ource, Inc. (JST), is a processor and distribator of a of coffee. The company of
ID: 2542313 • Letter: O
Question
ource, Inc. (JST), is a processor and distribator of a of coffee. The company offee beans from around the world and roasts, blends, and packages them for resale. JSI of that it sells to gourmet shops in oae-pound bags. The major the coffee is raw materials. However, the company's predominantly automated roasting, blending, and packing processes requiresubstantial amount of manufacturing overhead. The vanety arge variety of different coffees sells to company uses relatively little direct labor Some of JSIs coffees are very popular and sell in large volumes, while a few of the newer blends sell in very low volumes. ISI prices its coffees at manufacturing cost plus a markup or 25%. with some adjustments made to keep the company's prices competitive. For the coming year, JSI's budget includes estimated manufacturing overhead cost of 2,200,000. JSI assigns manufacturing overhead to products on the basis of direct labor-hours. Th expected direct labor cost totals $500,000, which represents S0,000 hours of direct labor time. Based on the sales budget and expected raw materials costs,the company will purchase and ase $5,000,000 of raw matecials (mostly coffee beans) during the year The expected costs for direct materials and direct labor for one-pound bags of two of the company's coffee products appear below. Viet Select $2.90 $0.24 Kenya Dark Direct materials... Direct abor (0.02 hours per bag) $0.24 JST's controller believes that the company's traditional costing system may be providingmis leading cost infonnation. To determine whether or not this is conect, the controller has prepared an analysis of the year's expected manufacturing overbead costs, as shown ihelowng table: Expected ActivityExpected Cost Activity Cost Pool Activity Measure for the Year for the Year Purchasing Material handing...N Quality control... oasting Blending. aaging. . Total manufacturing orders2,000 orders Number of setups 000 setups 560,000- 193,000 90,000 1 ,045,000 192,000 0000 Numben of batches 00 batches Roasting hours 95,000 roasting hours 32,000 blending hours Blending hours Packaging hours 24,000 packaging hours overhead cost. $2,200,000 Data regarding the expected production of Kenya Dark and Viet Select coffee are presented below Kenya Dark Viet Select 80,000 pounds 5,000 pounds 4,000 pounds 500 pounds Setups. Purchase order size Roasthg time per 100 pounds Blending time per 100 pounds Packaging time per 100 pounds . . 2 per batch 2 per batch 500 pounds 1.5 roasting hours 0.5 blending hours 03 packaging hours 20,000 pounds 1.5 roasting hours 0.5 blending hours 0-3 packaging hours . . .Explanation / Answer
Solution:
1. a. The predetermined overhead rate would be computed as follows:
Expected manufacturing overhead cost/Estimated direct labor hours
$2,200,000/50,000 DLH
= $44 per DLH
b. The unit product cost per pound, using the company’s present costing system, would be:
Kenya Dark
Viet
Select
Direct materials (given)...........................
$4.50
$2.90
Direct labor (given)..................................
0.24
0.24
Manufacturing overhead:
0.02 DLH × $44 per DLH.........................
0.88
0.88
Total unit product cost.............................
$5.62
$4.02
2. a. Overhead rates for each activity cost pool:
Activity Cost Pools
(a)
Estimated Overhead Costs
(b)
Expected
Activity
(a) ÷ (b)
Activity Rate
Purchasing....................
$560,000
2,000
orders
$280
per order
Material handling..........
$193,000
1,000
setups
$193
per setup
Quality control..............
$90,000
500
batches
$180
per batch
Roasting.......................
$1,045,000
95,000
hours
$11
per hour
Blending.......................
$192,000
32,000
hours
$6
per hour
Packaging.....................
$120,000
24,000
hours
$5
per hour
The necessary computations follow:
Number of purchase orders:
Kenya Dark: 80,000 pounds ÷ 20,000 pounds per order = 4 orders
Viet Select: 4,000 pounds ÷ 500 pounds per order = 8 orders
Number of setups:
Kenya Dark: 16 batches × 2 setups per batch = 32 setups
Viet Select: 8 batches × 2 setups per batch = 16 setups
Number of batches:
Kenya Dark: 80,000 pounds ÷ 5,000 pounds per batch = 16 batches
Viet Select: 4,000 pounds ÷ 500 pounds per batch = 8 batches
Roasting hours:
Kenya Dark: 1.5 hours × (80,000 pounds ÷ 100 pounds) = 1,200 hours
Viet Select: 1.5 hours × (4,000 pounds ÷ 100 pounds) = 60 hours
Blending hours:
Kenya Dark: 0.5 hour × (80,000 pounds ÷ 100 pounds) = 400 hours
Viet Select: 0.5 hour × (4,000 pounds ÷ 100 pounds) = 20 hours
Packaging hours:
Kenya Dark: 0.3 hour × (80,000 pounds ÷ 100 pounds) = 240 hours
Viet Select: 0.3 hour × (4,000 pounds ÷ 100 pounds) = 12 hours
The overhead applied to each product can be determined as follows:
Kenya Dark
Activity Cost Pool
Activity Rate
Expected Activity
Amount
Purchasing...........................
$280
per order
4
orders
$ 1,120
Material handling.................
$193
per setup
32
setups
6,176
Quality control......................
$180
per batch
16
batches
2,880
Roasting...............................
$11
per roasting hour
1,200
roasting hours
13,200
Blending...............................
$6
per blending hour
400
blending hours
2,400
Packaging.............................
$5
per packaging hour
240
packaging hours
1,200
Total....................................
$26,976
Viet Select
Activity Cost Pool
Activity Rate
Expected Activity
Amount
Purchasing...........................
$280
per order
8
orders
$2,240
Material handling.................
$193
per setup
16
setups
3,088
Quality control......................
$180
per batch
8
batches
1,440
Roasting...............................
$11
per roasting hour
60
roasting hours
660
Blending...............................
$6
per blending hour
20
blending hours
120
Packaging.............................
$5
per packaging hour
12
packaging hours
60
Total....................................
$7,608
b. According to the activity-based absorption costing system, the manufacturing overhead cost per pound is:
Kenya
Dark
Viet
Select
Total overhead cost assigned (above) (a)...........................
$26,976
$7,608
Number of pounds manufactured (b)................................
80,000
4,000
Cost per pound (a) ÷ (b)....................................................
$0.34
$1.90
c. The unit product costs according to the activity-based absorption costing system are:
Kenya
Dark
Viet
Select
Direct materials (given)............................
$4.50
$2.90
Direct labor (given)..................................
0.24
0.24
Manufacturing overhead.........................
0.34
1.90
Total unit product cost.............................
$5.08
$5.04
3.
MEMO TO THE PRESIDENT: The analysis of JSI’s data indicates that several activities other than direct labor helps in the manufacturing overhead costs of the company. It includes purchase orders issued, number of setups for material processing and number of batches processed. The present costing system of company depends on direct labor time as the only basis for assigning overhead cost to products. Implication of ABC approach is that low volume product may be not be covered the costs of the manufacturing resources used. Under present costing and pricing system, high volume products like Kenya Dark Coffee may be subsidized the low volume products.
Kenya Dark
Viet
Select
Direct materials (given)...........................
$4.50
$2.90
Direct labor (given)..................................
0.24
0.24
Manufacturing overhead:
0.02 DLH × $44 per DLH.........................
0.88
0.88
Total unit product cost.............................
$5.62
$4.02
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