$Java Source, Inc. (JSI) buys coffee beans from around the world and roasts, ble
ID: 2567208 • Letter: #
Question
$Java Source, Inc. (JSI) buys coffee beans from around the world and roasts, blends, and packages them for resale. Some of JSI's coffees are very popular and sell in large volumes, while a few of the newer blends sell in very low volumes. JSI prices its coffees at manufacturing cost plus a markup of 25%.
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. The expected direct labor cost totals $600,000, which reresents 50,000 hours of direct labor time. The expected costs for direct materials and direct labor for one-pound bags of two of the company's coffee products appear below
JSI's controller believes that the company's traditional costing system may be providing misleading cost information. To determin whether or not this is correct, the controller has prepared an analysis of the year's expected manufacturing overhead costs, as shown in the following table:
Data regarding the expected production of Kenya Dark and Viet Select coffee are presented below.
Required:
1. Using direct labor-hours as the manufacturing overhead cost allocation base, do the following:
a. Determine the plantwide predetermined overhead rate that will be used during the year.
b. Determine the unit product cost of one pound of Kenya Dark coffee and one pound of Viet Select coffee.
2. Uning the activity-based absorption costing approach, do the following:
a. Determine the total amount of manufacturing overhead cost assigned to Kenya Dark coffee and to Viet Select coffee for the year
b. Using the data developed in (2a) above, compute the amount of manufacturing overhead cost per pound of Kenya Dark coffee and Viet Select coffee
c. Determine the unit product cost of one pound of Kenya Dark coffee and one pound of Viet Select coffee
Kenya Dark Viet Select Direct Materials $4.50 $2.90 Direct Labor (0.02 hours per bag) $0.34 $0.34Explanation / Answer
Answer 1-a. Traditional Costing Predetermined Overhead Rate = $2,200,000 (Total Overhead) / 50,000 hrs (direct Labor hrs) Predetermined Overhead Rate = $44 per direct labor hr. Answer 1-b. Kenya Dark Viet Select Direct Material 4.50 2.90 Direct Labor 0.34 0.34 Overhead: Kenya Dark - 0.02 DLH X $44 0.88 Viet Select - 0.02 DLH X $44 0.88 Total Cost per pound 5.72 4.12 Answer 2-a. ABC Costing Activity Overhead Cost Driver Quantity Allocation Rate Purchasing 560,000 2,000 orders 280.00 per order Material Handling 193,000 1,000 setups 193.00 per Setup Quality Control 90,000 500 batches 180.00 per batch Roasting 1,045,000 95,000 roasting hrs 11.00 per roasting hr Blending 192,000 32,000 blending hrs 6.00 per blending hr Packaging 120,000 24,000 packaging hrs 5.00 per packaging hr Total 2,200,000 Assigning Overhead Cost to Product Model Using ABC Method Activity Based Overhead Rate Kenya Dark Viet Select Cost Driver Incurred OH Allocated Cost Driver Incurred OH Allocated Purchasing 280.00 per order 4 orders 1,120 8 orders 2,240 Material Handling 193.00 per Setup 32 setups 6,176 16 setups 3,088 Quality Control 180.00 per batch 16 batches 2,880 8 batches 1,440 Roasting 11.00 per roasting hr 1,200 roasting hrs 13,200 60 roasting hrs 660 Blending 6.00 per blending hr 400 blending hrs 2,400 20 blending hrs 120 Packaging 5.00 per packaging hr 240 packaging hrs 1,200 12 packaging hrs 60 Total Overhead Cost 26,976 7,608 Answer 2-b. Kenya Dark Viet Select Total Overhead Cost 26,976 7,608 Pounds Produced 80,000 4,000 Overhead cost per Pound 0.34 1.90 Answer 2-c. Kenya Dark Viet Select Direct Material 4.50 2.90 Direct Labor 0.34 0.34 Overhead cost per Pound 0.34 1.90 Total Cost per Unit 5.18 5.14
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