Kopi Tarik Sdn Bhd (KPSB) 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. KPSB 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 roasting, blending and packing processes require a substantial amount of overhead. The company uses relatively little direct labor.
Some of KPSB's coffee are very popular and sells in large volumes, while a few of the newer blends sells in very low volumes. KPSB 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, KPSB's budget includes estimated manufacturing overhead cost of RM2,200,000. KPSB assigns manufacturing overhead to products on the basis of direct labor hours. The expected direct labor cost totals RM 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 products appear below:
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Blue Coffee (RM)
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White Coffee (RM)
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Direct materials
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4.50
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2.90
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|
Direct labor (0.02 hrs per bag)
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0.24
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0.24
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KPSB's controller believes 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 table below:
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Activity Cost Pool
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Activity Measure
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Expected Activity for the Year
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Expected Cost For the Year (RM)
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Purchasing
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Purchase Orders
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2,000 orders
|
560,000
|
|
Material Handling
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Number of Setups
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1,000 setups
|
193,000
|
|
Quality Control
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Number of batches
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500 batches
|
90,000
|
|
Roasting
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Roasting hours
|
95,000 roasting hours
|
1,045,000
|
|
Blending
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Blending hours
|
32,000 blending hours
|
192,000
|
|
Packaging
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Packaging hours
|
24,000 packaging hours
|
120,000
|
|
Total Manufacturing Overhead Cost
|
|
|
2,200,000
|
Data regarding the expected production of Blue Coffee and White Coffee are presented below:
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Blue Coffee
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White Coffee
|
|
Expected Sales (Production)
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80,000 pounds
|
4,000 pounds
|
|
Batch Size
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5,000 pounds
|
500 pounds
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|
Set up
|
2 per batch
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2 per batch
|
|
Purchase order size
|
20,000 pounds
|
500 pounds
|
|
Roasting time per 100 pounds
|
1.5 roasting hrs
|
1.5 roasting hrs
|
|
Blending time per 100 pounds
|
0.5 blending hrs
|
0.5 blending hrs
|
|
Packaging time per 100 pounds
|
0.3 packaging hrs
|
0.3 packaging hrs
|
Required
Using direct labor hours as the base for assigning manufacturing overhead cost to the products: Determine the predetermined overhead rate that will be used during the yearDetermine the unit product cost of one pound of Blue Coffee and one pound of White Coffee.
Using activity - based costing as the basis for assigning manufacturing overhead cost to products:Determine the total amount of manufacturing overhead cost assigned to Blue Coffee and White Coffee for the year. Please show all schedules & workings.Using the data developed in (2a) above, compute the amount of manufacturing overhead cost per pound of the Blue Coffee and the White Coffee. Round up to the nearest whole cents.Determine the unit product cost of one pound of Blue Coffee and one pound of White Coffee.Write a brief memo to the president of KTSB explaining what you have found in (1) and (2) above and discussing the implications to the company using direct labor hours as the basis for assigning manufacturing overhead cost to products.