Managerial Accounting

CASE STUDY: Coffee Bean, Inc. (CBI)

1. Using direct labor-hours as the base for assigning manufacturing overhead

cost to products do the following:
a. Given:
Estimated Overhead Cost $3,000,000
Direct Labor Cost $600,000
Direct Labor hours 50,000 hours

$ 3000000
Predetermined overhead rate 50000 =

b.

MONA MALAYSIA
LOA N
Direct Materials $4.20 $3.20
Direct labor (0.025hrs./bag) 0.30 0.30
Manufacturing overhead
1.50 1.50
(60x.025)
Unit product cost $6.00 $5.00

2.

Activity Cost Expected Expected Activity

Pool Cost Activity Rate
Purchasing $513,000 1710 orders $300/order
Material
720,000 1800setups $400/setup
Handling
Quality control 144,000 600 batches $240/batch
Roasting 961,000 96,100 roasting $10/hour
Blending 402,000 33,500 blending $12/hour
260,000 26,000
Packaging $10/ hour
260,000 packaging hours
Total
$3,000,0
manufacturing
00
overhead
 2a.

ACTIVITIES,
MONA LOA MALAYSIAN
Activity rate
Expected Amou Expected
Amount
Activity nt Activity
Purchasing, (100,000/20,00 $1,50 (2,000/500)
$1,200
$300/order 0) = 5 orders 0 = 4 orders
Material
(3x10) = 30 (3x4) = 12
handling, 12000 4,800
setups setups
$400/order
Quality (100,000/10,00
(2,000/100)
control, 0) = 10 2400 960
= 4 batches
$240/batch batches
Roasting, {(100,000/100) {2,000/100)x
10000 200
$10/hour x1} = 1,000 1} = 20

Blending, {(100,000/100) {(2,000/100)x

6000 120
$12/hour x0.5} = 500 0.5} = 10

Packaging, {(100,000/100) {(2,000/100)x

1000 20
$10/hour x0.1} = 100 0.1} = 2
Total
$32,9
Manufacturin $7,300
00
g Overhead

2b. Malaysian

$ 7,300
=3.65
Manufacturing Overhead/unit = 2 , 000

Mona Loa

$ 32,900
=0.33
Manufacturing Overhead/unit = 100,000

MONA MALAYSIA 2c.

LOA N
Direct Materials $4.20 $3.20
Direct labor
0.3 0.3
(0.025hrs./bag)
Manufacturing overhead 0.33 3.65
Unit product cost $4.83 $7.15
3. Memo to the
President
To the President of Coffee Beans Inc.

Subject: ABC Costing vs. Traditional Costing

From the above data, it is clearly shown that the unit cost per product
is distorted by the use of Traditional Costing System. Using the
Traditional System, the Mona Loa product is overly costed while the
Malaysian product is understated because the overhead cost is based
on the direct labor-hours. With the use of this system, other things
were not taken into consideration, falsifying the costing of the product.

When the ABC system was employed, the costs were found basing on
the activity bases that the product underwent. This system illustrated a
clearer picture of the cost of the product, making a more precise cost
of the product.