Coffee Bean Inc.

Coffee Bean, Inc. (CBI), is a processor and distributor of a transition of blends of cocoa tree tree. The confederacy buys coffee beans from around the world and roasts, blends, and packages them for resale. CBI currently has 40 incompatible coffees that it sells to gourmet shops in one- vex bags. The major salute of the coffee is raw materials. However, the companys predominately automated roasting, blending, and packing process requires a substantial add of manufacturing operating expense.The company uses relatively little trail labor. Some of CBIs coffees atomic number 18 very popular and sell in large volumes, while a few of the newer blends have very low volumes. CBI lives its coffee at manufacturing personify plus a markup of 30%. If CBIs prices for certain coffees argon significantly higher than market, adjustments are made to bring CBIs prices more into coalescency with the market since customers are somewhat price conscious.For the coming year, CBIs cypher includes estimated manufacturing smasher follow of $3,000,000. CBI assigns manufacturing strike to products on the terms of compute labor- mins. The evaluate unmediated labor live bes $600,000, which represents 50,000 hours of unionise 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 necessitate materials and direct labor for one-pound bags of two of the companys coffee products appear downstairs Mona Loa Malaysian Direct materials $ 4. 0 $ 3. 20 Direct labor 0. 30 0. 30 CBIs controller believes that the companys traditional cost system may be providing misleding cost information.To determine whether or non this is correct, the controller has prepared an analysis of the years expected manufacturing overhead costs, as shown in the pursuit table Activity hail puss Activity Measure Expected Activity for the Year Expected Cost for the Year Purchasing Purchase orders 1,710 orders $513,000 Materials handling of Setups 1,800 setups 720,000 Quality control of Batches 600 batches 144,000 roast Roasting-hours 96,100 roasting hours 961,000 Blending Blending-hours 33,600 blending hours 402,000 package Packaging-hours 26,000 packaging hours 260,000 Total manufacturing overhead cost $3,000,000 Data regarding the expected production of Mona Loa and Malaysian coffee are presented below. Mona Loa Malaysian Expected sales 100,000 pounds 2,000 pounds Batch size 10,000 pounds cholecalciferol pounds Setups 3 per batch 3 per batch Purchase order size 20,000 pounds 500 pounds Roasting time per 100 pounds 1 hour 1 hour Blending time per 100 pounds 0. 5 hour 0. hour Packaging time per 100 pounds 0. 1 hour 0. 1 hour 1.Using the direct labor-ho urs as the base for assigning manufacturing overhead cost to products, do the following a. Determine the predetermined overhead rate that will be utilise during the year. b. Determine the unit product cost of one pound of the Mona Loa coffee and one pound of the Malaysian coffee. 2. Using activeness- base cost as the basis for assigning manufacturing overhead cost to products, do the following a. Determine the total amount of manufacturing overhead cost assigned to the Mona Loa coffee and to the Malaysian coffee for the year. b. Using the data developed in 2(a), computer the amount of manufacturing overhead cost per pound of the Mona Loa coffee and the Malaysian coffee.Round all computations to the nearest solid cent. c. Determine the unit product cost of one pound of the Mona Loa coffee and one pound of the Malaysian coffee. Write a brief memoranda to the president of CBI explaining what you have found in (1) and (2) above and discussing the implications to the company of use d irect labor as the base for assigning manufacturing overhead cost to products. MEMORANDUM ToThe president of CBI From Date Subjectthe implications to the company of victimisation direct labor as the base for assigning manufacturing overhead cost to products. 1) Per pound cost of the Mona Loa coffee and the Malaysian coffee as per traditional cost system is $ 6 and $ 5 respectively. ) The manufacturing overhead assigned to each pound of the Mona Loa coffee and the Malaysian coffee is same because the direct labour hours needful for manufacturing each pound of coffee are same 3) Per pound cost of the Mona Loa coffee and the Malaysian coffee as per Activity based cost system is $ 4. 83 and $ 7. 15 respectively. 4) Following are the implications to the company of using direct labor as the base for assigning manufacturing overhead cost to products 1. Price determination under existing be system (using direct labor as the base) is not accurate. Under activity based costing cost is calc ulated more accurately than existing product costing system. 2. Higher prices of popular product affect market adversely.As the customers are price conscious company can sell Mona Loa Coffee (which is more popular) at lower price and can increase its market share if the cost is calculated accurately. 3. As company uses relatively little direct labour, direct labour is not an appropriate basis for applying overheads to products. 4. By using activity based costing company can discontinue its non-profitable products or signal appropriate price for those product 5) Activity based costing allocated confirmatory cost more accurately . It helps in reducing the cost by eliminating unwanted activities Helps in improving product and customer profitability. Activity based costing helps in forecasting and planning.