CASE: Activity-Based Costing as an Alternative to Traditional Product Costing
Coffee Bean Ltd. (CBL), 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. CBL currently has ! different coffees that it sells to gourmet shops in one"pound bags. The ma#or cost of the coffee is raw materials. $owever, $owever, the company%s company%s predominantly automated roasting, blending, and packing process re&uires a substantial amount of manufacturing overhead. overhead. The company uses relatively little direct labour. labour. 'ome of CBL%s coffees are very popular and sell in large volumes, while a few of the newer blends have very low volumes. CBL prices its coffee at manufacturing cost plus a mark"up of !. *f CBL%s prices for certain coffees are significantly higher than market, ad#ustments are made to bring CBL%s prices more into alignment with the market since customers are somewhat price conscious. +or the coming year, CBL%s budget includes estimated manufacturing overhead cost of ,!!!,!!!. ,!!!,!!!. CBL assigns manufacturing overhead to products on the basis of direct labour" hours. The e-pected direct labour cost totals !!,!!!, which represents /!,!!! hours of direct labor time. Based on the sales budget and e-pected raw materials costs, the company will purchase and use ,!!!,!!! of raw materials (mostly coffee beans) during the year. The e-pected costs for direct materials and direct labour for one"pound bags of two of the company%s coffee products appear below.
Mona Loa
Malaysian
0irect materials
.1!
.1!
0irect labour (!.!1/ hours per bag)
!.!
!.!
CBL%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 e-pected manufacturing overhead costs, as shown in the following table2
Activity cost pool
Activity measure
Expected activity for te year
Expected cost for te year
Purcasing
3urchase orders
4,54! orders
/4,!!!
Material andling
6umber of setups
4,7!! setups
51!,!!!
!uality control
6umber of batches
!! batches
4,!!!
"oasting
8oasting hours
9!,4!! hours
94,!!!
Blending
Blending hours
,/!! hours
!1,!!!
Pac#aging
3ackaging hours
1/,!!! hours
1!,!!! ,!!,!!!
Total manufacturing overead cost
0ata regarding the e-pected production of :ona Loa and :alaysian coffee are presented below.
Mona Loa
Malaysian
Expected sales
4!!,!!! pounds
1,!!! pounds
Batc si$e
4!,!!! pounds
/!! pounds
Setups
per batch
per batch
Purcase order si$e
1!,!!! pounds
/!! pounds
"oasting time per %&& pounds
4 hour
4 hour
Blending time per %&& pounds
!./ hour
!./ hour
Pac#aging time per %&& pounds
!.4 hour
!.4 hour
Required:
4.
1.
.
;sing direct labour"hours as the base for assigning manufacturing overhead cost to products, do the following2 a. 0etermine the predetermined overhead rate that will be used during the year. b. 0etermine the unit product cost of one pound of the :ona Loa coffee and one pound of the :alaysian coffee. ;sing activity"based costing as the basis for assigning manufacturing overhead cost to products, do the following2 a. 0etermine the total amount of manufacturing overhead cost assigned to the :ona Loa coffee and to the :alaysian coffee for the year. b. ;sing the data developed in (1a) above, compute the amount of manufacturing overhead cost per pound of the :ona Loa coffee and the :alaysian coffee. 8ound all computations to the nearest whole cent. c. 0etermine the unit product cost of one pound of the :ona Loa coffee and one pound of the :alaysian coffee.
