Coffee Bean, Inc. (CBI), 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. CBI currently has 40 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 predominately automated roasting, blending, and packing process requires a substantial amount of manufacturing overhead. The company uses relatively little direct labor. Some of CBI’s coffees are very popular and sell in large volumes, while a few of the newer blends have very low volumes. CBI prices its coffee at manufacturing cost plus a markup of 30%. If CBI’s prices for certain coffees are significantly higher than market, adjustments are made to bring CBI’s prices more into alignment with the market since customers are somewhat price conscious. For the coming year, CBI’s budget includes estimated manufacturing overhead cost of $3,000,000. CBI assigns manufacturing overhead to products on the basis of direct labor-hours. The expected direct labor cost totals $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 $6,000,000 of raw materials (mostly coffee beans) during the year. The expected costs for direct materials and direct labor for one-pound bags of two of the company’s coffee products appear below: | | | | |Mona Loa | |Malaysian | | | |Direct materials | |$ 4.20 | |$ 3.20 | | | |Direct labor | |0.30 | |0.30 | | |
CBI’s controller believes that the company’s traditional costing system may be providing misleding 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: |Activity Cost Pool | |Activity Measure | |Expected Activity for the Year | |Expected Cost for the Year | | | |Purchasing | |Purchase orders...
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