Volume-Based Costing versus ABC Coffee Bean Inc. (CBI) processes and distributes a varietyof coffee. CBI buys coffee beans from around the world and roasts, blends, and packages them forresale. Currently, the firm offers 15 coffees to gourmet shops in 1-pound bags. The major cost isdirect materials; however, a substantial amount of factory overhead is incurred in the predominantlyautomated 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 havevery low volumes. CBI prices its coffee at full product cost, including allocated overhead, plus amarkup of 30%. If its prices for certain coffees are significantly higher than the market, CBI lowersits prices. The company competes primarily on the quality of its products, but customers are priceconscious as well.Data for the current budget include factory overhead of $3,000,000, which has been allocatedon the basis of each product’s direct labor cost. The budgeted direct labor cost for the current yeartotals $600,000. The firm budgeted $6,000,000 for purchase and use of direct materials (mostlycoffee beans).The budgeted direct costs for 1-pound bags of two of the company’s many products are as follows:Mona Loa MalaysianDirect materials $4.20 $3.20Direct labor 0.30 0.30CBI’s controller, Mona Clin, believes that its current product costing system could be providing misleading cost information. She has developed this analysis of the current year’s budgeted factory overhead costs:Activity Cost DriverBudgeted Driver Consumption Budgeted CostPurchasing Purchase orders 1,158 $ 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 $3,000,000 Data regarding the current year’s production of just two of its lines, Mona Loa and Malaysian, follow.There is no beginning or ending direct materials inventory for either of these coffees.Mona Loa MalaysianBudgeted sales 100,000 pounds 2,000 poundsBatch size 10,000 pounds 500 poundsSetups 3 per batch 3 per batchPurchase order size 25,000 pounds 500 poundsRoasting time 1 hour per 100 pounds 1 hour per 100 poundsBlending time 0.5 hour per 100 pounds 0.5 hour per 100 poundsPackaging time 0.1 hour per 100 pounds 0.1 hour per 100 poundsRequired1. Using Coffee Bean Inc.’s current product costing system,a. Determine the company’s predetermined overhead rate using direct labor cost as the single costdriver.b. Determine the full product costs and selling prices of one pound of Mona Loa coffee and one poundof Malaysian coffee.2. Using an activity-based costing approach, develop a new product cost for 1 pound of Mona Loa coffeeand 1 pound of Malaysian coffee. Allocate all overhead costs to the 100,000 pounds of Mona Loa andthe 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 productmix strategies? How does ABC add to CBI’s competitive advantage?
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
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 1-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%. 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 current budget include factory overhead of $3,000,000, which has been allocated
on the basis of each product’s direct labor cost. The budgeted direct labor cost for the current year
totals $600,000. The firm budgeted $6,000,000 for purchase and use of direct materials (mostly
coffee beans).
The budgeted direct costs for 1-pound bags of two of the company’s many products are as follows:
Mona Loa Malaysian
Direct materials $4.20 $3.20
Direct labor 0.30 0.30
CBI’s controller, Mona Clin, believes that its current product costing system could be providing misleading cost information. She has developed this analysis of the current year’s budgeted factory overhead costs:
Activity Cost Driver
Budgeted
Driver Consumption Budgeted Cost
Purchasing Purchase orders 1,158 $ 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
Data regarding the current year’s production of just two of its lines, Mona Loa and Malaysian, follow.
There is no beginning or ending direct materials inventory for either of these coffees.
Mona Loa Malaysian
Budgeted sales 100,000 pounds 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 1 pound of Mona Loa coffee
and 1 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?
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