Question

CBI buys coffee beans from around the world and roasts, blends, and packages them for resale. The major cost is direct materials; however, there is substantial manufacturing overhead 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, whereas a few of the newer blends sell in very low volumes. CBI prices its coffee at budgeted cost, including allocated overhead, plus a markup on cost of 30%. Data for 2013 budget include manufacturing overhead of $3,000,000, which has been allocated on the basis of each product’s budgeted direct-labor cost. The budgeted direct-labor cost for 2013 totals $600,000. Purchases and use of materials (mostly coffee beans) are budgeted to total $6,000,000. The budgeted direct costs for one-pound bags of two of the company’s products are: Mauna Loa Malaysian Direct Materials $4.20 $3.20 Direct Labor .30 .30 CBI’s controller believes the existing simple cost system may be providing misleading cost information. She has developed an activity-based analysis of the 2013 budgeted manufacturing costs, which is shown in the following table: Activity Cost Driver Cost-Driver-Rate Purchasing Purchase orders $500 Material Handling Loads moved 400 Quality Control Batches 240 Roasting Roasting-hours 10 Blending Blending-hours 10 Packaging Packaging-hours 10 Budgeted data regarding the 2013 production of the Mauna Loa and Malaysian coffee follow. There will be no beginning or ending material inventory for either of these coffees. Mauna Loa Malaysian Expected Sales 100,000 pounds 2,000 pounds Purchase orders 4 4 Batches 10 4 Loads moved 30 12 Roasting-hours 1,000 20 Blending-hours 500 10 Packaging-hours 100 2 Required: 1. Using CBI’s simple costing system: a. Determine the company’s 2013 budgeted manufacturing overhead rate using direct-rate cost as the single allocation base. Manufacturing overhead allocated / Budgeted Direct Labor Cost b. Determine the 2013 budgeted costs and selling price of 1 pound of Mauna Loa coffee and 1 pound of Malaysian coffee. 2. Use the controller’s activity-based approach to estimate the 2013 cost of 1 pound of a. Mauna Loa coffee b. Malaysian coffee What does ABC tell you that traditional costing does not with regard to this case study?

Answer 1

CBI's simple costing system determines the budgeted manufacturing overhead rate using direct labor cost as the allocation base. The budgeted costs and selling prices of Mauna Loa and Malaysian coffee are calculated using this system. However, the controller's activity-based approach provides a more accurate estimation of the cost of each product, considering various activities that drive overhead costs.

Step-by-step explanation:

1. Using CBI’s simple costing system:

1. a. To determine the company’s 2013 budgeted manufacturing overhead rate using direct labor cost as the single allocation base, divide the manufacturing overhead allocated ($3,000,000) by the budgeted direct labor cost ($600,000):
2. Manufacturing overhead rate = Manufacturing overhead allocated / Budgeted Direct Labor Cost
3. Manufacturing overhead rate = $3,000,000 / $600,000 = $5
4. b. To determine the 2013 budgeted costs and selling price of 1 pound of Mauna Loa coffee and 1 pound of Malaysian coffee, calculate:
5. Mauna Loa budgeted costs = Direct materials + Direct labor + Manufacturing overhead
6. Mauna Loa budgeted costs = $4.20 + $0.30 + $5 = $9.50
7. Mauna Loa selling price = Mauna Loa budgeted costs + Markup
8. Mauna Loa selling price = $9.50 + ($9.50 * 0.3) = $12.35
9. Malaysian budgeted costs = Direct materials + Direct labor + Manufacturing overhead
10. Malaysian budgeted costs = $3.20 + $0.30 + $5 = $8.50
11. Malaysian selling price = Malaysian budgeted costs + Markup
12. Malaysian selling price = $8.50 + ($8.50 * 0.3) = $11.05

2. Using the controller’s activity-based approach to estimate the 2013 cost of 1 pound of:

1. a. Mauna Loa coffee:
2. Mauna Loa coffee cost = Purchasing cost + Material handling cost + Quality control cost + Roasting cost + Blending cost + Packaging cost
3. Mauna Loa coffee cost = (4 * $500) + (30 * $400) + (10 * $240) + (1,000 * $10) + (500 * $10) + (100 * $10) = $103,000
4. b. Malaysian coffee:
5. Malaysian coffee cost = Purchasing cost + Material handling cost + Quality control cost + Roasting cost + Blending cost + Packaging cost
6. Malaysian coffee cost = (4 * $500) + (12 * $400) + (4 * $240) + (20 * $10) + (10 * $10) + (2 * $10) = $26,680

Activity-based costing (ABC) tells us that traditional costing does not accurately allocate overhead costs. By using activity-based analysis, CBI is able to more accurately allocate overhead costs based on the activities that drive those costs, such as purchasing, material handling, quality control, roasting, blending, and packaging. This allows for a more accurate estimation of the cost of each product, as opposed to simply relying on a single allocation base like direct labor cost.