Gourmet Specialty Coffee Company (GSCC) is a distributor and processor of differ
ID: 2349376 • Letter: G
Question
Gourmet Specialty Coffee Company (GSCC) is a distributor and processor of different blends of coffee. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. GSCC currently has 12 different coffees that it offers to gourmet shops in one-pound bags. The major cost is raw materials; however, there is a substantial amount of manufacturing overhead in the predominantly automated roasting and packing process. The company uses relatively little direct labor. Some of the coffees are very popular and sell in large volumes, while a few of the newer blends have very low volumes. GSCC prices its coffee at full product cost, including allocated overhead, plus a markup of 30 percent. If prices for certain coffees are significantly higher than market, adjustments are made. The company competes primarily on the quality of its products, but customers are price-conscious as well. Data for the 20x5 budget include manufacturing overhead of $12,000,000, which has been allocated on the basis of each products direct-labor cost. The budgeted direct-labor cost for 20x5 totals $1,200,000. Based on the sales budget and raw-material budget, purchases and use of raw materials (mostly coffee beans) will total $5,800,000.
The expected prime costs for one-pound bags of two of the companys products are as follows:
Jamaican /Colombian
Direct material ......................................................................................................... $2.90/ $3.90
Direct labor ............................................................................................................. .40/ .40
GSCCs controller believes the traditional product-costing system may be providing misleading
cost information. She has developed an analysis of the 20x5 budgeted manufacturing-overhead costs
shown in the following chart.
Activity /Cost Driver /Budgeted Activity /Budgeted Cost
Purchasing ........................ Purchase orders ................ 2,316 ................... $ 2,316,000
Material handling ............... Setups .............................. 3,600 ................... 2,880,000
Quality control ................... Batches ............................. 1,440 ................... 576,000
Roasting ............................ Roasting hours .................. 192,200 ................... 3,844,000
Blending ............................ Blending hours .................. 67,200 ................... 1,344,000
Packaging ......................... Packaging hours ................ 52,000 ................... 1,040,000
Total manufacturing-overhead cost ............................................................................................... $12,000,000
Data regarding the 20x5 production of Jamaican and Colombian coffee are shown in the following
table. There will be no raw-material inventory for either of these coffees at the beginning of the
year.
Jamaican/ Colombian
Budgeted sales ............................................................................... 2,000 lb. 100,000 lb.
Batch size ...................................................................................... 500 lb. 20,000 lb.
Setups ........................................................................................... 3 per batch 3 per batch
Purchase order size ........................................................................ 500 lb. 50,000 lb.
Roasting time ................................................................................. 1 hr. per 200 lb. 1 hr. per 200 lb.
Blending time ................................................................................. .5 hr. per 200 lb. .5 hr. per 200 lb.
Packaging time ............................................................................... .1 hr. per 200 lb. .1 hr. per 200 lb.
Required:
1. Using GSCCs current product-costing system:
a. Determine the companys predetermined overhead rate using direct-labor cost as the single
cost driver.
b. Determine the full product costs and selling prices of one pound of Jamaican coffee and one
pound of Colombian coffee.
2. Develop a new product cost, using an activity-based costing approach, for one pound of Jamaican
coffee and one pound of Colombian coffee.
3. What are the implications of the activity-based costing system with respect to:
a. The use of direct labor as a basis for applying overhead to products?
b. The use of the existing product-costing system as the basis for pricing?
Explanation / Answer
1(a)Overhead rate = total manufacturing overhead / budgeted direct labor cost =12000000/1200000 = 10.00 per direct labor dollar. 1(b)Jamaican 2.90 0.40 4.00 7.30 2.19 9.49 Colombian 3.90 0.40 4.00 8.30 2.49 10.79 Direct Material Direct Labor Overhead (.4 x $10). Full Product Cost Markup (30%) Selling Price. 2.The new product cost: Activity Purchasing Material handling Quality control Roasting Blending Packaging Cost Driver Purchase orders Setups Batches Roasting hours Blending hours Packaging hours Budgeted Activity 2,316.00 3,600.00 1,440.00 192,200.00 67,200.00 5,200.00 Budgeted Cost Unit Cost 2,316,000.00 1,000.00 2,880,000.00 800.00 576,000.00 400.00 3,844,000.00 20.00 1,344,000.00 20.00 1,040,000.00 200.00 Jamacian Coffee Standard Cost per Pound: Direct material Direct labor Purchasing (4 orders* $1,000/2,000 lb) Material handling (12 setups $800/2,000 lb) Quality control (4 batches $400/2,000 lb) Roasting (10 hours $20/2,000 lb) Blending (5 hours $20/2,000 lb) Packaging (1 hours $20/2,000 lb) Total cost *Budgeted sales purchase order size 2,000 lbs. 500 lbs. = 4 orders Colombian Coffee Standard Cost per Pound: Direct material Direct labor Purchasing (2 orders* $1,000/100,000 lb) Material handling (15 setups $800/100,000 lb) Quality control (5 batches $400/100,000 lb) Roasting (500 hours $20/100,000 lb) Blending (250 hours $20/100,000 lb) Packaging (50 hours $20/100,000 lb) Total cost *Budgeted sales purchase order size 100,000 lbs. 50,000 lbs. = 2 orders 3.90 0.40 0.02 0.12 0.02 0.10 0.05 0.01 4.62 2.90 0.40 2.00 4.80 0.80 0.10 0.05 0.01 11.06 3(a)The ABC analysis indicates that several activities other than direct labor drive overhead. The cost computations show that the current system significantly under costed Jamaican coffee, the low-volume product, and significantly overcosted the high-volume product, Colombian coffee. 3(b)The implication of the ABC analysis is that the low-volume products are using resources but are not covering their share of the cost of those resources. The Jamaican blend is currently priced at $9.49 which is significantly below its activity-based cost of $11.06. The company should set long-run prices above cost. If there is excess capacity and many of the costs are fixed, it may be acceptable to price some products below full activity-based cost temporarily in order to build demand for the product. Otherwise, the high-volume, high-margin products are subsidizing the low-volume, low-margin products.
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