Part 1 of the assignment requires you to determine the cost of a unit of coffee (Mona Loa and Malaysian) using the activity-based costing method. As with the traditional method, you will need to show direct materials, direct labor and manufacturing overhead (as determined using ABC). Once again, use formulas wherever you can.
Part 1A is a comparison of both methods. Link the numbers to Parts 1 and 2 whenever possible. Show a side-by-side comparison of unit product costs calculated under each method (show the unit product cost of each type of coffee using both traditional and ABC costing). Unit product costs include direct materials, direct labor and manufacturing overhead costs on a per unit basis. Further, determine the changes in the profit margins for each bag of coffee under both methods (the sales price mark up % is given below). How much was the company losing per bag of the Malaysian coffee under the Traditional Method? Remember to use formulas.
Part 2 requires you to write a memo on your findings. The memo should be addressed to the president of Coffee Bean, Inc. The tone and format of the memo should be professional. Make recommendations based on your findings. Point out what caused differences between the two methods. Also, point out any potential problems you see with your recommendations (hint: see the part of the chapter on the limitations of ABC). The memo should be less than 300 words. Presidents don't like to read long memos!
Activity-Based Costing as an Alternative to Traditional Product Costing
Coffee Bean, Inc. (CBI), is a processor and distributor of a variety of blends of coffee. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. CBI currently has 40 different coffees that it sells to gourmet shops in one-pound bags. The major cost of the coffee is raw materials. However, the company's predominantly automated roasting, blending, and packing process requires a substantial amount of manufacturing overhead. The company uses relatively little direct labor.
Some of CBI's coffees are very popular and sell in large volumes, while a few of the newer blends have very low volumes. CBI prices its coffee at manufacturing cost plus a markup of 30%. If CBI's prices for certain coffees are significantly higher than market, adjustments are made to bring CBI's prices more into alignment with the market because customers are somewhat price conscious.
For the coming year, CBI's budget includes estimated manufacturing overhead cost of $4,500,000. CBI assigns manufacturing overhead to products on the basis of direct labor-hours. The expected direct labor cost totals $600,000, which represents 80,000 hours of direct labor time. Based on the sales budget and expected raw materials costs, the company will purchase and use $6,000,000 of raw materials (mostly coffee beans) during the year.
The expected costs for direct materials and direct labor for one-pound bags of two of the company's coffee products appear below.
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Mona Loa
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Malaysian
|
|
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Direct materials
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$
|
4.20
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$
|
3.20
|
|
|
Direct labor (0.05 hours per bag)
|
$
|
0.30
|
$
|
0.30
|