Managerial Accounting - Activity-Based Costing

Green Land Coffee Ltd. makes two types of coffee, Gourmet and Espresso, and applies overhead on the basis of direct-labor hours when the traditional costing system is used. Anticipated manufacturing overhead for the upcoming accounting period is $350,000. Information about the products follows.

Product	Selling Price	DM (Coffee beans)	DL	# of Packs estimated and made
Gourmet	$38	$5	1hr/pack @$12/hr	20,000
Espresso	$60	$10	1.5hrs/pack @$12/hr	10,000

Further investigations show that Browns manufacturing overhead of $350,000 consist of:

	Total cost
Setups	$68,000
Machine depreciation	100,000
Electricity (machinery)	60,000
Product inspection	40,000
Maintenance	80,000

,and Greens pays factory insurance $2,000 (only for Espresso) annually.

The costs in the table are driven by number of Setups, machine hours worked, and the number of inspections, respectively. Data relevant to these activities follow.

Product	Number of Setups	Number of inspections
Gourmet	200	200
Espresso	300	800

Maintenance is performed prior to each production run. Each production run can produce 250 packs of Gourmet coffee or 150 packs of Espresso. Espresso used 45% of the 40,000 total machine hours.

Moreover, 60% of office personnels job is to record the results of inspections. Their salary in this coming accounting period is $10,000. They spend rest of their time to deal with customers. (Assume actual activities are the same as estimated activities.)

Required:

1. Calculate the cost per unit of each product using traditional costing method, assuming use of direct-labor hours to apply overhead to production.

2. Assuming use of activity-based costing, compute the unit costs of the Gourmet and Espresso coffee. (Please round to two decimals for the unit costs.)

3. By using direct-labor hours as an application base, which product is over-costed and which product is under-costed? Calculate the total amount of cost distortion for each product.

4. In January 2017 Jimi Coffee house has requested 1,100 packs of Espresso for its coffee shops. You want the free marketing that this will provide so you are willing to offer them 1,100 packs Espresso at a price equal to your cost. Please calculate and explain any additional Maintenance costs for the 1,100 packs of Espresso.