Java Inc. is a distributor and processor of a variety of different blends of coffee. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. Java Inc. currently offers 10 different coffees in 500-gram bags to gourmet shops. The major cost is raw materials; however, there is a substantial amount of manufacturing overhead in the mostly automated roasting and packing process. The company uses relatively little direct labour.

Some of the coffees are very popular and sell in large volumes, while a few of the newer blends have very low volumes. Java Inc. prices its coffee at total product costs, including allocated overhead, plus a markup of 25%. If prices for certain coffees are significantly higher than market, the prices are adjusted lower.

Data for the 2016 budget include manufacturing overhead of $3.5 million, which has been allocated in the existing costing system based on each product's budgeted direct labour cost. The budgeted direct labour cost for 2016 totals $700,000. Purchases and use of materials (mostly coffee beans) are budgeted to total $6 million.

Data for the 2016 production of Mocha and Vanilla coffee are as follows. There will be no beginning or ending materials inventory for either of these coffees.

Java's controller believes the traditional costing system may be providing misleading cost information. He has developed an activity-based analysis of the 2016 budgeted manufacturing overhead costs shown in the following table:

Instructions
(a) Calculate the company's 2016 budgeted manufacturing overhead rate using direct labour costs as the single rate and the 2016 budgeted costs and selling prices of 500 grams of Mocha coffee and 500 grams of Vanilla coffee.
(b) Use the controller's activity-based approach to estimate the 2016 budgeted cost for one kilogram of Mocha coffee and one kilogram of Vanilla coffee.
(c) Comment on the results.

Direct materials Direct labour Mocha $3.20 $0.25 Vanilla $2.80 $0.25 Mocha 50,000 kilograms 50,000 kilograms Vanilla 1,000 kilograms Expected sales Batch size Set-ups Purchase order size Roasting time Blending time Packaging time 250 kilograms 3 per batch 250 kilograms 1 hour/50 kg 0.5 hour/50 kg 0.1 hour/50 kg 3 per batch 12,500 kilograms 1 hour/50 kg 0.5 hour/50 kg 0.1 hour/50 kg Activity Pools Purchasing Materials handling Quality control Roasting Blending Packaging Total manufacturing overhead cost Cost Drivers Purchase orders Set-ups Batches Roasting hours Blending hours Packaging hours Budgeted Units Budgeted Cost 1,150 1,750 500 100,000 23,125 30,000 $575,000 612,500 150,000 950,000 462,500 750,000 $3,500,000