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5-61    Volume-Based Costing Versus ABC Coffee Bean Inc. (CBI) processes and distributes a variety of coffee. CBI buys coffee beans from around the world and roasts, blends, and packages them for resale. Currently the firm offers 15 coffees to gourmet shops in one-pound bags. The major cost is direct materials; however, a substantial amount of factory overhead is incurred in the predominantly automated roasting and packing process. The company uses relatively little direct labor.

Some of the coffees are very popular and sell in large volumes; a few of the newer brands have very low volumes. CBI prices its coffee at full product cost, including allocated overhead, plus a

 

 

 

 

 

 

markup of 30 percent. If its prices for certain coffees are significantly higher than the market, CBI lowers its prices. The company competes primarily on the quality of its products, but customers are price conscious as well.

Data for the 2010 budget include factory overhead of $3,000,000, which has been allocated by its current costing system on the basis of each product’s direct labor cost. The budgeted direct labor cost for 2010 totals $600,000. The firm budgeted $6,000,000 for purchases and use of direct materials (mostly coffee beans).

The budgeted direct costs for one-pound bags of two of the company’s products are as follows:

 

  Direct materials	Mona Loa $4.20	Malaysian $3.20
Direct labor	0.30	0.30

 

CBI’s controller, Mona Clin, believes that its current product costing system could be providing mis- leading cost information. She has developed this analysis of the 2010 budgeted factory overhead costs:

 

Activity Purchasing	Cost Driver Purchase orders	Budgeted Activity 1,158	Budgeted Cost $ 579,000
Materials handling	Setups	1,800	720,000
Quality control	Batches	720	144,000
Roasting	Roasting-hours	96,100	961,000
Blending	Blending-hours	33,600	336,000
Packaging	Packaging-hours	26,000	260,000
Total factory overhead cost	Â	Â	$3,000,000

 

Data regarding the 2010 production of two of its lines, Mona Loa and Malaysian, follow. There is no beginning or ending direct materials inventory for either of these coffees.

 

  Budgeted sales	Mona Loa 100,000 pounds	Malaysian 2,000 pounds
Batch size	10,000 pounds	500 pounds
Setups	3 per batch	3 per batch
Purchase order size	25,000 pounds	500 pounds
Roasting time	1 hour per 100 pounds	1 hour per 100 pounds
Blending time	0.5 hour per 100 pounds	0.5 hour per 100 pounds
Packaging time	0.1 hour per 100 pounds	0.1 hour per 100 pounds

 

Required

1.    Using Coffee Bean Inc.’s current product costing system,

a.      Determine the company’s predetermined overhead rate using direct labor cost as the single cost driver.

b.     Determine the full product costs and selling prices of one pound of Mona Loa coffee and one pound of Malaysian coffee.

2.    Using an activity-based costing approach, develop a new product cost for one pound of Mona Loa coffee and one pound of Malaysian coffee. Allocate all overhead costs to the 100,000 pounds of Mona Loa and the 2,000 pounds of Malaysian. Compare the results with those in requirement 1.

3.    What are the implications of the activity-based costing system with respect to CBI’s pricing and product mix strategies? How does ABC add to CBI’s competitive advantage?