BUSA 40049-CBI buys coffee beans from around the world and roasts

BUSA 40049-CBI buys coffee beans from around the world and roasts

Question
The goal is to have the best presentation for management to understand the
issue.
Grading is based on following the instructions.
Part 1: Traditional costing: 35 points.
Under ABC, each activity should have a cost per pound (not just an overall
overhead) for 30 points.
Format and final ABC question: 35 points. Case Study:
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
Direct Labor $4.20
.30 $3.20
.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
Purchasing
Material Handling
Quality Control
Roasting
Blending
Packaging Cost Driver
Purchase orders
Loads moved
Batches
Roasting-hours
Blending-hours
Packaging-hours Cost-Driver-Rate
$500
400
240
10
10
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
Purchase orders
Batches
Loads moved
Roasting-hours
Blending-hours
Packaging-hours 100,000 pounds
4
10
30
1,000
500
100 2,000 pounds
4
4
12
20
10
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?