Coffee Bean Inc. $($CBI$)$

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 one$-$pound bags. The major cost is direct materials;

however, a substantial amount of factory overhead is incurred in the predominantly automated

roasting and packaging 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 $30$ percent. 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 by

its current costing system 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 purchases and

use of direct materials $($mostly coffee beans$).$

The budgeted direct costs for one$-$pound bags of two of the company's many products are as

follows: $\backslash$table$[[,$Mona Loa,Malaysian$],[,$$$4\mathrm{.}20,$$$3\mathrm{.}20],[$Direct Materials,$$0\mathrm{.}30,$$$0\mathrm{.}30],[$Direct Labor $($hours$),0\mathrm{.}30,0\mathrm{.}30]]$

CBI's controller, Mona Clin, believes that its current product costing system could be providing misleading cost information. The company calculates a predetermined overhead rate using direct labour cost as the single cost driver. Normal sales mark$-$up percentage is $30\%$ of full cost.

She has developed this analysis of the current year's budgeted factory overhead costs:

$\backslash$table$[[$Activity$,$Cost Driver,$\backslash$table$[[$Budgeted Driver$],[$Consumption$]],\backslash$table$[[$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]]$

$1$ Direct Labor Budget

$$600,000$

Direct materials budget

$$6,000,000$

Data regarding the current year's production of just two of the company's products, Mona Loa

and Malaysian, follow. There is no beginning or ending direct materials inventory for either of

these coffees.

Mona is wondering what the difference in full product costs and selling prices for one pound of

Mona Loa coffee and one pound of Malaysian coffee under the current costing approach is

compared to using an ABC approach. Allocate all overhead costs to the $100,000$ pounds of Mona

Loa and the $2,000$ pounds of Malaysian. She would also like to know what are the implications

of the ABC system with respect to CBI's product pricing? Mona is wondering what the difference in full product costs and selling prices for one pound of

Mona Loa coffee and one pound of Malaysian coffee under the current costing approach is

compared to using an ABC approach. Allocate all overhead costs to the $100,000$ pounds of Mona

Loa and the $2,000$ pounds of Malaysian. She would also like to know what are the implications

of the ABC system with respect to CBI's product pricing?

Required

Prepare a report to address Mona's questions.