Java Source Inc.: Activity-Based Costing

Topics: Cost, Pound sterling, Costs Pages: 2 (603 words) Published: November 25, 2014
College of Economics and Management
Graduate School

Management 213 Activity-Based-Costing Prepared by: Mr. Sergs F. Sancon


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 a one-pound bags. The major cost of the coffee is raw materials. However, the company’s predominantly automated roasting, blending and packaging process require a substantial amount of manufacturing overhead. The company uses relatively little direct labor.

Some of JSI’s coffees are very popular and sell in large volumes, while a few of the newer blends sell in a 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 $2,200,000. JSI 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 $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

$ 4.50
$ 2.90
Direct labor (0.02 hours per bag)

$ 0.24
$ 0.24

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,...
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