Global Gourmet Coffee Company $($GGCC$)$ is a distributor and processor of different blends of coffee. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. GGCC currently has $15$ different coffees that it offers to gourmet shops in one$-$pound bags. The major cost is raw materials; however, there is a substantial amount of 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, while a few of the newer blends have very low volumes. GGCC prices its coffee at full product cost, including allocated overhead, plus a markup of $30$ percent. If prices for certain coffees are significantly higher than market, adjustments are made. The company competes primarily on the quality of its products, but customers are price$-$conscious as well.

Data for the $20$x$1$ budget include manufacturing overhead of $$23,208,480,$ which has been allocated on the basis of each product$’$s direct$-$labor cost. The budgeted direct$-$labor cost for $20$x$1$ totals $$2,320,848.$ Based on the sales budget and raw$-$material budget, purchases and use of raw materials $($mostly coffee beans$)$ will total $$7,700,000.$

The expected prime costs for one$-$pound bags of two of the company$’$s products are as follows:

Items Kona Malaysian

Direct material $ $3\mathrm{.}20$ $ $4\mathrm{.}20$

Direct labor $0\mathrm{.}500\mathrm{.}50$

GGCC$’$s controller believes the traditional product$-$costing system may be providing misleading cost information. She has developed an analysis of the $20$x$1$ budgeted manufacturing$-$overhead costs shown in the following chart.

Activity Cost Driver Budgeted Activity Budgeted Cost

Purchasing Purchase orders $2,791$ $ $3,851,580$

Material handling Setups $4,3604,730,600$

Quality control Batches $1,8201,073,800$

Roasting Roasting hours $211,2008,236,800$

Blending Blending hours $74,8002,917,200$

Packaging Packaging hours $61,5002,398,500$

Total manufacturing$-$overhead cost $ $23,208,480$

Data regarding the $20$x$1$ production of Kona and Malaysian coffee are shown in the following table. There will be no raw$-$material inventory for either of these coffees at the beginning of the year.

Items Kona Malaysian

Budgeted sales $5,800$ pound $119,000$ pound

Batch size $1,450$ pound $23,800$ pound

Setups $3$ per batch $3$ per batch

Purchase order size $1,450$ pound $59,500$ pound

Roasting time $1$ hour per $100$ pound $1$ hour per $100$ pound

Blending time $0\mathrm{.}5$ hour per $100$ pound $0\mathrm{.}5$ hour per $100$ pound

Packaging time $0\mathrm{.}1$ hour per $100$ pound $0\mathrm{.}1$ hour per $100$ pound

Required:

Using GGCC$’$s current product$-$costing system:

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

Determine the full product costs and selling prices of one pound of Kona coffee and one pound of Malaysian coffee.

Develop a new product cost, using an activity$-$based costing approach, for one pound of Kona coffee and one pound of Malaysian coffee.

 

Answer rating: 100% (QA)

1 Determining the Predetermined Overhead Rate using Direct Labor Cost as the Single Cost Driver To determine the predetermined overhead rate we divide ... View the full answer