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 represents 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. Kenya Dark Viet Select Direct materials 4.5 2.90 Direct labor (0.02 hours per bag) 0.34 0.34 JSI’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 expected manufacturing overhead costs, as shown in the following table: Activity Cost Pool Activity Measure Expected Activity for the Year Expected Cost for the Year Purchasing Purchase orders 2,000 orders $ 560,000 Material handling Number of setups 1,000 setups 193,000 Quality control Number of batches 500 batches 90,000 Roasting Roasting hours 95,000 roasting hours 1,045,000 Blending Blending hours 32,000 blending hours 192,000 Packaging Packaging hours 24,000 packaging hours 120,000 Total manufacturing overhead cost $2,200,000 Data regarding the expected production of Kenya Dark and Viet Select coffee are presented below. Kenya Dark Viet Select Expected sales ....................... 80,000 pounds 4,000 pounds Batch size ........................... 5,000 pounds 500 pounds Setups .............................. 2 per batch 2 per batch Purchase order size ................... 20,000 pounds 500 pounds Roasting time per 100 pounds ......... 1.5 roasting hours 1.5 roasting hours Blending time per 100 pounds ......... 0.5 blending hours 0.5 blending hours Packaging time per 100 pounds ........ 0.3 packaging hours 0.3 packaging hours Required: Using direct labor-hours as the manufacturing overhead cost allocation base, do the following: Determine the plantwide predetermined overhead rate that will be used during the year. Determine the unit product cost of one pound of Kenya Dark coffee and one pound of Viet Select coffee. Using the activity-based absorption costing approach, do the following: Determine the total amount of manufacturing overhead cost assigned to Kenya Dark coffee and to Viet Select coffee for the year. Using the data developed in (2a) above, compute the amount of manufacturing overhead cost per pound of Kenya Dark coffee and Viet Select coffee. Determine the unit product cost of one pound of Kenya Dark coffee and one pound of Viet Select coffee. Write a brief memo to the president of JSI that explains what you found in (1) and (2) above and that discusses the implications of using direct labor-hours as the only manufacturing overhead cost allocation base.
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
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|
Kenya Dark |
Viet Select |
|
Direct materials |
4.5 |
2.90 |
|
Direct labor (0.02 hours per bag) |
0.34 |
0.34 |
JSI’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 expected manufacturing overhead costs, as shown in the following table:
Activity Cost Pool Activity Measure Expected Activity for the Year Expected Cost for the Year
Purchasing Purchase orders 2,000 orders $ 560,000
Material handling Number of setups 1,000 setups 193,000
Quality control Number of batches 500 batches 90,000
Roasting Roasting hours 95,000 roasting hours 1,045,000
Blending Blending hours 32,000 blending hours 192,000
Packaging Packaging hours 24,000 packaging hours 120,000
Total manufacturing overhead cost $2,200,000
Data regarding the expected production of Kenya Dark and Viet Select coffee are presented below.
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Kenya Dark Viet Select |
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Expected sales ....................... 80,000 pounds 4,000 pounds |
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Batch size ........................... 5,000 pounds 500 pounds Setups .............................. 2 per batch 2 per batch Purchase order size ................... 20,000 pounds 500 pounds Roasting time per 100 pounds ......... 1.5 roasting hours 1.5 roasting hours Blending time per 100 pounds ......... 0.5 blending hours 0.5 blending hours Packaging time per 100 pounds ........ 0.3 packaging hours 0.3 packaging hours |
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Required:
- Using direct labor-hours as the manufacturing overhead cost allocation base, do the following:
- Determine the plantwide predetermined overhead rate that will be used during the year.
- Determine the unit product cost of one pound of Kenya Dark coffee and one pound of
Viet Select coffee.
- Using the activity-based absorption costing approach, do the following:
- Determine the total amount of manufacturing overhead cost assigned to Kenya Dark coffee
and to Viet Select coffee for the year.
- Using the data developed in (2a) above, compute the amount of manufacturing overhead
cost per pound of Kenya Dark coffee and Viet Select coffee.
- Determine the unit product cost of one pound of Kenya Dark coffee and one pound of
Viet Select coffee.
- Write a brief memo to the president of JSI that explains what you found in (1) and (2) above
and that discusses the implications of using direct labor-hours as the only manufacturing overhead cost allocation base.
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