Coffee Bean, Inc. (CBI) is a processor and distributor of a variety of blends of
ID: 2503081 • Letter: C
Question
Coffee Bean, Inc. (CBI) is a processor and distributor of a variety of blends of coffee. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. CBI currently has 40 different coffees that it sells to gourmet shops in one-pund bags. The major cost of the coffee is raw materials. However, the company's predominantly automated roasting, blending, and packing process requires a substantial amount of manufacturing overhead. The company uses relatively little direct labor.
Some of CBI's coffees are very popular and sell in large volumes, while a few of their newer blends have very low volumes. CBI prices its coffee at manufacturing cost plus a markup of 30%. If CBI's prices for certain coffees are significantly higher than the market, adjustments are made to bring CBI's prices more into alignment with the market because customers are somewhat price conscious.
For the coming year, CBI's budget includes estimated manufacturing overhead cost of $3,000,000. CBI assigns manufacturing overhead to products on the basis of direct labor-hours. The expected direct labor cost totals $600,000, which represents 50,000 hours of direct labor time. Based on the sales budget and expected raw materials costs, the company will purchase and use $6,000,000 of raw materials (mostly coffee beans) during the year.
The expected cost for direct materials and direct labor for one-pound bags of two of the company's coffee products appear below.
Mona Loa
Malaysian
Direct materials
$4.20
$3.20
Direct labor (0.025 hours per bag)
$0.30
$0.30
CBI's controller believes that the company's traditional costing system may be providing misleading cost information. To determine whether or not this is correct, the controller has prepared an analysis of the year's expected manufacturing overthead cost, as shown in the following table:
Activity cost pool
Activity measure
Expected Activity for the year
Expected cost for the year
Purchasing
Purchase orders
1,710 orders
$513,000
Material handling
Number of setups
1,800 setups
$720,000
Quality control
Number of batches
600 batches
$144,000
Roasting
Roasting hours
96,100 roasting hours
$961,000
Blending
Blending hours
33,500 blending hours
$402,000
Packaging
Packaging hours
26,000 packaging hours
$260,000
Total manufacturing overhead cost
$3,000,000
Data regarding the expected production of Mona Loa and Malaysian coffee are presented below.
Mona Loa
Malaysian
Expected sales
100,000 pounds
2,000 pounds
Batch size
10,000 pounds
500 pounds
Setups
3 per batch
3 per batch
Purchase order size
20,000 pounds
500 pounds
Roasting time per 100 pounds
1.0 hour
1.0 hour
Blending time per 100 pounds
0.5 hour
0.5 hour
Packaging time per 100 pounds
0.1 hour
0.1 hour
REQUIRED:
Mona Loa
Malaysian
Direct materials
$4.20
$3.20
Direct labor (0.025 hours per bag)
$0.30
$0.30
Explanation / Answer
http://www.chegg.com/homework-help/activity-based-costing-alternative-traditional-product-costi-chapter-7b-problem-5c-solution-9780077317843-exc