Gourmet Specialty Coffee Company (GSCC) is a distributor andprocessor of different blends of coffee. The company buys coffeebeans from around the world and roasts, blends, and packages themfor resale. GSCC currently has 12 different coffees that it offersto gourmet shops in one-pound bags. The major cost is rawmaterials; however, there is a substantial amount of manufacturingoverhead in the predominantly automated roasting and packingprocess. The company uses relatively little direct labor. Some ofthe coffees are very popular and sell in large volumes, while a fewof the newer blends have very low volumes. GSCC prices its coffeeat full product cost, including allocated overhead, plus a markupof 30 percent. If prices for certain coffees are significantlyhigher than market, adjustments are made. The company competesprimarily on the quality of its products, but customers areprice-conscious as well. Data for the 20x5 budget includemanufacturing overhead of $12,000,000, which has been allocated onthe basis of each product�s direct-labor cost. The budgeteddirect-labor cost for 20x5 totals $1,200,000. Based on the salesbudget and raw-material budget, purchases and use of raw materials(mostly coffee beans) will total $5,800,000.
The expected prime costs for one-poundbags of two of the company�s products are as follows:
Jamaican/Colombian
Direct material.........................................................................................................$2.90/ $3.90
Direct labor..............................................................................................................40/ .40
GSCC�s controller believes thetraditional product-costing system may be providing misleading
cost information. She has developed ananalysis of the 20x5 budgeted manufacturing-overhead costs
shown in the following chart.
Activity /Cost Driver/Budgeted Activity /Budgeted Cost
Purchasing ........................Purchase orders ................ 2,316 ................... $2,316,000
Material handling ...............Setups .............................. 3,600 ...................2,880,000
Quality control ...................Batches ............................. 1,440 ...................576,000
Roasting ............................Roasting hours .................. 192,200 ...................3,844,000
Blending ............................Blending hours .................. 67,200 ...................1,344,000
Packaging .........................Packaging hours ................ 52,000 ...................1,040,000
Total manufacturing-overhead cost...............................................................................................$12,000,000
Data regarding the 20x5 production ofJamaican and Colombian coffee are shown in the following
table. There will be no raw-materialinventory for either of these coffees at the beginning of the
year.
Jamaican/Colombian
Budgeted sales...............................................................................2,000 lb. 100,000 lb.
Batch size......................................................................................500 lb. 20,000 lb.
Setups...........................................................................................3 per batch 3 per batch
Purchase order size........................................................................500 lb. 50,000 lb.
Roasting time.................................................................................1 hr. per 200 lb. 1 hr. per 200 lb.
Blending time..................................................................................5 hr. per 200 lb. .5 hr. per 200 lb.
Packaging time................................................................................1 hr. per 200 lb. .1 hr. per 200 lb.
Required:
1. Using GSCC�s currentproduct-costing system:
a. Determine the company�spredetermined overhead rate using direct-labor cost as thesingle
cost driver.
b. Determine the full productcosts and selling prices of one pound of Jamaican coffee andone
pound of Colombian coffee.
2. Develop a new product cost,using an activity-based costing approach, for one pound ofJamaican
coffee and one pound of Colombiancoffee.
3. What are the implications ofthe activity-based costing system with respect to:
a. The use of direct labor as abasis for applying overhead to products?
b. The use of the existingproduct-costing system as the basis for pricing?
Gourmet Specialty Coffee Company (GSCC) is a distributor andprocessor of different blends of coffee. The company buys coffeebeans from around the world and roasts, blends, and packages themfor resale. GSCC currently has 12 different coffees that it offersto gourmet shops in one-pound bags. The major cost is rawmaterials; however, there is a substantial amount of manufacturingoverhead in the predominantly automated roasting and packingprocess. The company uses relatively little direct labor. Some ofthe coffees are very popular and sell in large volumes, while a fewof the newer blends have very low volumes. GSCC prices its coffeeat full product cost, including allocated overhead, plus a markupof 30 percent. If prices for certain coffees are significantlyhigher than market, adjustments are made. The company competesprimarily on the quality of its products, but customers areprice-conscious as well. Data for the 20x5 budget includemanufacturing overhead of $12,000,000, which has been allocated onthe basis of each product�s direct-labor cost. The budgeteddirect-labor cost for 20x5 totals $1,200,000. Based on the salesbudget and raw-material budget, purchases and use of raw materials(mostly coffee beans) will total $5,800,000.
The expected prime costs for one-poundbags of two of the company�s products are as follows:
Jamaican/Colombian
Direct material.........................................................................................................$2.90/ $3.90
Direct labor..............................................................................................................40/ .40
GSCC�s controller believes thetraditional product-costing system may be providing misleading
cost information. She has developed ananalysis of the 20x5 budgeted manufacturing-overhead costs
shown in the following chart.
Activity /Cost Driver/Budgeted Activity /Budgeted Cost
Purchasing ........................Purchase orders ................ 2,316 ................... $2,316,000
Material handling ...............Setups .............................. 3,600 ...................2,880,000
Quality control ...................Batches ............................. 1,440 ...................576,000
Roasting ............................Roasting hours .................. 192,200 ...................3,844,000
Blending ............................Blending hours .................. 67,200 ...................1,344,000
Packaging .........................Packaging hours ................ 52,000 ...................1,040,000
Total manufacturing-overhead cost...............................................................................................$12,000,000
Data regarding the 20x5 production ofJamaican and Colombian coffee are shown in the following
table. There will be no raw-materialinventory for either of these coffees at the beginning of the
year.
Jamaican/Colombian
Budgeted sales...............................................................................2,000 lb. 100,000 lb.
Batch size......................................................................................500 lb. 20,000 lb.
Setups...........................................................................................3 per batch 3 per batch
Purchase order size........................................................................500 lb. 50,000 lb.
Roasting time.................................................................................1 hr. per 200 lb. 1 hr. per 200 lb.
Blending time..................................................................................5 hr. per 200 lb. .5 hr. per 200 lb.
Packaging time................................................................................1 hr. per 200 lb. .1 hr. per 200 lb.
Required:
1. Using GSCC�s currentproduct-costing system:
a. Determine the company�spredetermined overhead rate using direct-labor cost as thesingle
cost driver.
b. Determine the full productcosts and selling prices of one pound of Jamaican coffee andone
pound of Colombian coffee.
2. Develop a new product cost,using an activity-based costing approach, for one pound ofJamaican
coffee and one pound of Colombiancoffee.
3. What are the implications ofthe activity-based costing system with respect to:
a. The use of direct labor as abasis for applying overhead to products?
b. The use of the existingproduct-costing system as the basis for pricing?
