cost allocation and activity based costing 461147

Java Source, Inc. (JSI), is a processor and distributor of a variety of blends of coffee. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. JSI offers a large variety of different coffees that it sells to gourmet shops in one-pound bags. The major cost of the coffee is raw materials. However, the company’s predominantly automated roasteing, blending, and packing processes requires a substanial amount of manufacturing overhead. The company uses relatively little direct labor.

Some of Jsi’s coffees are very popular and sell in large volumes, while a few of the newer blends sell in very low volumes. JSI prices its coffees at manufacturing cost plus a markup of 25%, with some adjustments made to keep the company’s prices competitive.

For the coming year, JSI’s budget includes estimated manufacturing overhead costs of $2,200,000. JSI assigns manufacturing overhead to products on the basis of direct labor-hours. The expected direct labor cost totals $600,000, which represents 50,000 hours of direct labor time. Based on the sales budget and expected raw materials costs, the company will purchase and use $5,000,000 of raw materials (mostly coffee beans) during the year.

The expected costs for direct materials and direct labor for one-pound bags of two of the company’s coffee products appear below.

Kenya Dark Viet Select

Direct materials $4.50 $2.90

Direct labor (0.02 hours per bag) $0.24 $0.24

JSI’s controllers believe that the company’s traditional costing system may be providing misleading cost information. To determine whether or not this is correct, the controller has prepared an analysis of the year’s expected manufacturing overhead costs, as shown in the following table:

Activity Cost Pool

Activity Measure Expected Activity

for the Year Expected Cost

for the Year

Purchasing Purchase orders 2,000 orders $560,000

Material handling Number of setups 1,000 setups $193,000

Quality control Number of batches 500 batches $90,000

Roasting Roasting hours 95,000 roasting hours $1,045,000

Blending Blending hours 32,000 blending hours $192,000

Packaging Packaging hours 24,000 packaging hours $120,000

Total maufacturing

overhead costs

$2,200,000

Data regarding the expected production of Kenya Dark and Viet Select coffee are presented below.

Kenya Dark Viet Select

Expected sales 80,000 pounds 4,000 pounds

Batch size 5,000 pounds 500 pounds

Setups 2 per batch 2 per batch

Purchase order size 20,000 pounds 500 pounds

Roasting time per 100 pounds 1.5 roasting hours 1.5 roasting hours

B lending time per 100 pounds 0.5 blending hours 0.5 blending hours

Packaging time per 100 pounds 0.3 packaging hours 0.3 packaging hours

Requirements:

1. Using direct labor-hours as the base for assigning manufacturing overhead cost to products, do the following:

a. Determine the predetermined overhead rate that will be used during the year.