Chapter 3A, Problem 3A.6C

Activity-Based Absorption Costing and Pricing LO3—5

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.

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:

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:
1. Determine the plantwide predetermined overhead rate that will be used during the year.
2. Determine the unit product cost of one pound of Kenya Dark coffee and one pound of Viet Select coffee.
2. Using the activity-based absorption costing approach, do the following:
1. Determine the total amount of manufacturing overhead cost assigned to Kenya Dark coffee and to Viet Select coffee for the year.
2. Using the data developed in (2a) above, compute the amount of manufacturing overhead cost per pound of Kenya Dark coffee and Viet Select coffee.
3. Determine the unit product cost of one pound of Kenya Dark coffee and one pound of Viet Select coffee.
3. Write a brief memo to the president of ISI 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.