Problem # 3

Coffee Bean, Inc.

1. a. Determine the Predetermined Overhead Rate that will be used during the year: Expected Manufacturing Overhead Cost = 111 Estimated direct labor-hours llll lll POHR: $60.00 per DLH $3,000,00 50,000 DLHS

b. Determine the unit product cost of one pound of Mona Loa Coffee and one pound of Malaysian: Direct materials Direct labor
Manufacturing overhead:

Mona Loa Malaysian $4.20 $3.20 0.30 0.30 1.50 $6.00 1.50 $5.00

0.025 DLH $60 per DLH Total unit product cost

c. Determine the selling price of one pound of the Mona Loa Coffee and one pound of the Malaysia coffee using the companys 30% makeup. Mona Loa Coffee Selling Price Per One Pound $6.00 Markup percentage ....................................................... 30% Markup in dollars .......................................................... $1.80 Selling Price with 30% Markup $7.80 Malaysia Coffee $5.00 30% $1.50 $6.50

2. a. Determine the total amount of manufacturing overhead cost assigned to the Mona Loa coffee and to the Malaysia coffee for the year. In order to determine the total amount of manufacturing overhead cost assigned we need to find the ABC overhead cost per unit and find the total number of activities for the Activity Cost pool. ABC Overhead Cost per Unit:

Estimated Overhead Activity Cost Pool Costs

Purchasing Material handling Quality control Roasting Blending Packaging ($513,000) ($720,000) ($144,000) ($961,000) ($402,000) ($260,000)

Expected Number of Activity

(1,710 orders) (1,800 setups) ( 600 batches) (96,100 hours) (33,500 hours) (26,000 hours)

Predetermined Overhead Rate

($300 per order) ($400 per setup) ($240 per batch) ($10 per hour ) ($12 per hour ) ($10 per hour )

Computation for the number of each activity pool:

Number of purchase orders: Mona Loa Coffee: 100,000 pounds 20,000 pounds per order = 5 orders Malaysian Coffee: 2,000 pounds 500 pounds per order = 4 orders Number of batches: Mona Loa Coffee: 100,000 pounds 10,000 pounds per batch = 10 batches Malaysian Coffee: 2,000 pounds 500 pounds per batch = 4 batches

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Number of setups: Mona Loa Coffee: 10 batches 3 setups per batch = 30 setups Malaysian Coffee: 4 batches 3 setups per batch = 12 setups Roasting hours: Mona Loa Coffee: 1 hour (100,000 pounds 100 pounds) = 1,000 hours Malaysian Coffee: 1 hour (2,000 pounds 100 pounds) = 20 hours Blending hours: Mona Loa Coffee: 0.5 hour (100,000 pounds 100 pounds) = 500 hours Malaysian Coffee: 0.5 hour (2,000 pounds 100 pounds) = 10 hours Packaging hours: Mona Loa Coffee: 0.1 hour (100,000 pounds 100 pounds) = 100 hours Malaysian Coffee: 0.1 hour (2,000 pounds 100 pounds) = 2 hours

Sacred Heart University

The overhead applied to Mona Loa Coffee:

Activity Cost Pool Purchasing ................... Material handling...... Quality control ........... Roasting ........................ Blending ........................ Packaging ..................... Total

Predetermined Overhead Rate $300 per order $400 per setup $240 per batch $10 per roasting hour $12 per blending hour $10 per packaging hour

5 30 10 1,000 500 100

# Overhead Activity Applied orders $ 1,500 setups 12,000 batches 2,400 roasting hours 10,000 blending hours 6,000 packaging hours 1,000 $32,900

The overhead applied to Malaysian Coffee:

Activity Cost Pool Purchasing ................... Material handling ...... Quality control............ Roasting ........................ Blending ........................ Packaging...................... Total

Predetermined Overhead Rate $300 per order $400 per setup $240 per batch $10 per roasting hour $12 per blending hour $10 per packaging hour

4 12 4 20 10 2

# Overhead Activity Applied orders $1,200 setups 4,800 batches 960 roasting hours 200 blending hours 120 packaging hours 20 $7,300

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b. Using the Data developed in (2a) above, compute the amount of manufacturing overhead cost per pound of Mona Loa coffee and Malaysian Coffee: Mona Loa Total overhead cost assigned ................................. $32,900 Number of pounds manufactured ....................... 100,000 Cost per pound $0.33 Malaysian $7,300 2,000 $3.65

c. Determine the unit product cost of one pound of Mona Loa coffee and one pound of Malaysian coffee:
Mona Loa Malaysian

Direct materials ................................ Direct labor......................................... Manufacturing overhead .............. Total unit product cost

$4.20 0.30 0.33 $4.83

$3.20 0.30 3.65 $7.15

3. Write a brief Memo to the President of CBI explaining what you found in (1) and (2) above and discussing the implications to the company of using direct labor as the base for signing manufacturing overhead cost to products. MEMO TO THE PRESIDENT: Dear President: My analysis of the Coffee Bean, Inc. data reveals that direct labor is not the only activity that drives our company manufacturing overhead cost but also purchase orders issued, number of setups the material handling, and number of batches processed. There are two major implications to our company of using direct labor as the base for assigning manufacturing overhead cost to products. 1) Our current cost system notably over-cost high volume products such as the Mona Loa Coffee 2) Notably under-Cost low volume products, such as the Malaysia coffee.

Sacred Heart University

On the Other hand, my ABC cost analysis reveals that a possible subsidizing issue is happening between our high and low volume products. Lets look at it more closely. For instance (Malaysia Coffee) a low volume product priced at $6.50 per pound under based on our current cost system versus ABC cost which is $7.15 per pound is possibly not covering the manufacturing resources that we have used. In conclusion, it would be more beneficial for our company to use the ABC cost system but price adjustment would be required to make sure we are appropriately covering all resources that are used in production. This analysis also reveals that the overhead cost shift of more appropriately assigning cost to productions on bases of activities involved rather that basis of direct labor hours.

Sacred Heart University