Variable Cost: Variable cost is a cost that changes when the volume of production changes, in the same direction and in the same proportion. Fixed Cost: Fixed cost is a cost that remains constant irrespective of changes in the production volume. Manufacturing cost : Manufacturing cost is the cost of manufacturing products or goods. Activity Base: Activity base is a production activity that is used in allocating overhead costs. 1a. To Determine: The predetermined overhead rate using direct labor hours for the year. Solution: The predetermined overhead rate using direct labor hours is $44 per direct labor hours that will be used during the year. 1b. To compute: The unit product cost of one pound of the Kenya Dark coffee and one pound of the Viet Select Coffee based on direct labor as a base activity. Solution: The unit product cost of one pound of the Kenya Dark coffee is $5.62 per pound and one pound of the Viet Select Coffee is $4.02 per pound using direct labor as a base activity. Calculation: The unit product cost calculated as below Kenya Dark Viet Select Direct materials $4.50 $2.90 Direct labors (0.02 hour per bag) $0.24 $0.24 Manufacturing overhead ) $0.88 $0.88 Total unit product cost per pound $5.62 $4.02 2a. To determine: The total amount of manufacturing overhead costs assigned to the Kenya Dark coffee and to the Viet Select Coffee based on activity-based absorption costing. Solution: Under activity-based absorption costing, the total amount of manufacturing overhead costs assigned to the Kenya Dark coffee and to the Viet Select Coffee can be calculated as below. Step 1: Calculation of cost per activity Activity cost pool Activity measure Expected activity for the year (A) Expected cost for the year (B) Cost per activity Purchasing Purchase orders 2,000 orders $560,000 $280 Material handling Number of setups 1,000 setups $193,000 $193 Quality control Number of batches 500 batches $90,000 $180 Roasting Roasting hours 95,000 hours $1,045,000 $11 Blending Blending hours 32,000 hours $192,000 $6 Packaging Packaging hours 24,000 hours $120,000 $5 Total manufacturing overhead cost $2,200,000 Step 2: The total amount of manufacturing overhead costs assigned to the Kenya Dark coffee Activity measure No of activity required (A) Cost per activity ( B) Total Cost Purchase orders $280 $1,120.00 Number of setups $193 $5,018.00 Number of batches $180 $2880.00 Roasting hours 1.50 Roasting hours $11 $16.50 Blending hours 0.50 Blending hours $6 $3.00 Packaging hours 0.30 Packaging hours $5 $1.50 Total manufacturing overhead cost $9,039.00 Step 3: The total amount of manufacturing overhead costs assigned to the Viet Select Coffee Activity measure No of activity required (A) Cost per activity ( B) Total Cost Purchase orders $280 $2,240.00 Number of setups $193 $3,088.00 Number of batches $180 $1440.00 Roasting hours 1.50 Roasting hours $11 $16.50 Blending hours 0.50 Blending hours $6 $3.00 Packaging hours 0.30 Packaging hours $5 $1.50 Total manufacturing overhead cost $6,789.00 2b. To compute: The amount of manufacturing overhead cost per pound of the Kenya Dark coffee and to the Viet Select Coffee based on activity-based absorption costing. Solution: The amount of manufacturing overhead cost per pound of the Kenya Dark coffee and to the Viet Select Coffee computed as below. Kenya Dark Viet Select Total manufacturing overhead cost (A) $9,039 $6,789 Total pounds (B) 80,000 4,000 Manufacturing overhead per pounds $0.11 $1.69 2 c. To determine: The unit product cost of one pound of the Kenya Dark coffee and one pound of the Viet Select Coffee based on activity-based absorption costing. Solution: The unit product cost of one pound of the Kenya Dark coffee and one pound of to the Viet Select Coffee based calculated as below: Kenya Dark Viet Select Direct materials $4.50 $2.90 Direct labors (0.02 hour per bag) $0.24 $0.24 Manufacturing overhead per pound $0.11 $1.69 The unit product cost per pound $4.85 $4.83 3. To write: A brief memo about the finding of above (1) and (2) and discuss the implication of using direct labor hours as a base for assigning manufacturing overhead to products. Solution: There is variation in the unit product cost per pound in both the methods. Per pound product cost of the Kenya Dark coffee is $5.62 under direct labor method and $4.85 under activity-based method. Per pound product cost of the Viet Select Coffee is $4.02 under direct labor method and $4.83 under activity-based method. The effect of using direct labor hours as a base for assigning manufacturing overhead to products is that the company is under-recovering the product cost of the Viet Select Coffee by $0.68 per pound.

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