awHill Educ.xCase 3A-6 | ezto.mheducation.com/hm.tpx?--0.8 180387456258728_15208

Question

awHill Educ.xCase 3A-6 | ezto.mheducation.com/hm.tpx?--0.8 180387456258728_1520809825107 Java Source, Inc. (JSI), 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. JSI 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 manufacturing overhead. The company uses relatively little direct labor Some of JSI's coffees are very popular and sell n large volumes, while a few of the newer blends sell in very low volumes JSI 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, JSI's budget includes estimated manufacturing overhead cost of $3,099,200. JSI assigns manufacturing overhead to products on the basis of direct labor-hours. The expected direct labor cost totals $552,000, which represents 46,000 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 coffee products appear below Direct materials Direct labor (030 hours per bag) Kenya Dark Viet Select $ 4.20 $ 3.20 $0.36 $ 0.36 JSI'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 following table: Expected Expected Activity for the Year Cost for the Activity Cost Pool Purchasing Material handling Quality control Roasting Blending Packaging Activity Measure Purchase orders Number of setups Number of batches Roasting hours Blending hours Packaging hours Year 1660 orders 1.830 setups S 498,000 732.000 145 600 1057,100 431.600 560 batches 96.100 roasting hours 33.200 blending hours 26,100 packaging hours 234 900 Total manufacturing overhead cost 5 3,099.200 Type here to search

Explanation / Answer

Solution:

Part 1(a) -- Predetermined Overhead Rate

- Predetermined Overhead Rate is the rate which is used to apply manufacturing overhead to products or job orders.

- Normally, it is calculated at the beginning of the period by using the estimated allocation base.

- It is calculated by dividing the estimated factory overhead cost by an allocation base (or suitable basis) at the beginning of the period.

- Allocation bases may be direct labor hours, direct labor costs, machine hours etc..

Predetermined Overhead Rate = Estimated Manufacturing Overhead Cost / Estimated Allocation Base

Predetermined Overhead Rate = Estimated Manufacturing Overhead Cost $3,099,200 / Estimated Direct Labor Hours 46,000 Hours

= $67.37 per DLH

Predetermined Overhead Rate $67.37 per DLH

Part 1(b) --- Unit Product Cost

Kenya Dark

Viet Select

Direct materials

$4.20

$3.20

Direct Labor

$0.36

$0.36

Applied Manufacturing Overhead

$2.02

(0.03 Hours x $67.37)

$2.02

(0.03 hours x $67.37)

Unit Product Cost

$6.58

$5.58

Part 2(a) & 2(b) --- Total amount of manufacturing overhead assigned to product for the year under Activity Based Costing

Activity Based Costing System

- ABC is a costing method which identifies the activities in the organization and assigns the cost of each activity with resources to all the products or services according to the actual consumption of activity by the product or service.

- This system determines all the activities related to product or production process.

- This system calculates the cost of those activities which are related to product or production process and thereafter determine the cost of the product.

- In ABC costing the overhead costs are distributed to the product on the basis of benefit received from indirect activity.

- It helps to distribution of overheads on the basis of activities.

The Activity based overhead rate = Estimated Overheads related to the activity / Total Cost Driver per activity or Expected Total Activity)

Now, we need to first calculate the activity rate.

Working for Part 2(a) and Part 2(b)

Kenya Dark

Viet Select

Activity Cost Pool

Expected Overhead Costs (A)

Total Expected Activity (B)

Activity Rate (C = A/B)

Activity Driver USAGE (H)

Overhead Assigned (C*H)

Activity Driver USAGE (E)

Overhead Assigned (C*E)

Purchasing

$498,000

1660

Orders

$300

per order

5

(Refer Note 1)

$1,500

5

(2000 / purchase order size 400

$1,500

Material handling

$732,000

1830

Setups

$400

per setup

30

(Refer Note 2 & 3)

$12,000

15

$6,000

Quality Control

$145,600

560

Batches

$260

per batch

10

(Refer Note 2 & 3)

$2,600

5

$1,300

Roasting

$1,057,100

96100

roasting hours

$11

per hour

1515

(101,000 / 100*1.5)

$16,665

30

(2000/100*1.5)

$330

Blending

$431,600

33200

blending hours

$13

per hour

505

(101000/100*0.5)

$6,565

10

(2000/100*0.5)

$130

Packaging

$234,900

26100

packaging hours

$9

per hour

303

(101000/100*0.3)

$2,727

6

(2000/100*0.3)

$54

Total Overhead Assigned (O)

$3,099,200

$42,057

$9,314

Expected Sales in pounds (P)

101000

$2,000

Overhead assigned per pound (O/P)

$0.42

4.66

Note 1 --- Number of Purchase Orders = Expected Sales quantity / Purchase order size

Kenya Dark – Number of Purchase orders = 101,000 / 20,200 = 5 orders

Viet Select - Number of Purchase orders = 2,000 / 400 = 5 orders

Note 2 – Number of Batches = Expected Sales quantity / Batch Size

Kenya Dark – Number of Batches = 101,000 / 10,100 = 10

Viet Select – Number of Batches = 2,000 / 400 = 5

Note 3 – Number of Setups = Number of batches x Number of setup per batch

Kenya Dark – Number of Setups = 10 * 3 = 30

Viet Select – Number of Setups = 5 * 3 = 15

Part 2(a) –

Kenya Dark

Viet Select

Total amount of manufacturing overhead cost

$42,057

$9,314

Part 2(b)

Kenya Dark

Viet Select

Manufacturing overhead cost per pound

$0.42

$4.66

Part 2-c---- Unit Product Cost

Kenya Dark

Viet Select

Direct materials

$4.20

$3.20

Direct Labor

$0.36

$0.36

Applied Manufacturing Overhead (Refer Part 2(b)

$0.42

$4.66

Unit Product Cost

$4.98

$8.22

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Kenya Dark

Viet Select

Direct materials

$4.20

$3.20

Direct Labor

$0.36

$0.36

Applied Manufacturing Overhead

$2.02

(0.03 Hours x $67.37)

$2.02

(0.03 hours x $67.37)

Unit Product Cost

$6.58

$5.58

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