Vacation Coffee Company (VCC) is a distributor and processor of different blends of coffee. The
company buys coffee beans from around the world and roasts, blends, and packages them for
esale. VCC cu
ently has 15 different coffees that it offers to gourmet shops in one-pound
ags. The major cost is raw materials; however, there is a substantial amount of manufacturing
overhead in the predominantly automated roasting and packing process. The company uses
elatively little direct labor.
Some of the coffees are very popular and sell in large volumes, while a few of the newer blends
have very low volumes. VCC prices its coffee at full product cost, including allocated overhead,
plus a markup of 40 percent. If prices for certain coffees are significantly higher than market,
adjustments are made. The company competes primarily on the quality of its products, but
customers are price-conscious as well.
Data for the 2018 budget include manufacturing overhead of $3,000,000, which has been
allocated on the basis of each product’s direct-labor cost. The budgeted direct-labor cost for
2018 totals $600,000. Based on the sales budget and raw-material budget, purchases and use
of raw materials (mostly coffee beans) will total $6,000,000.
The expected prime costs for one-pound bags of two of the company’s products are as follows:
Hawaiian Vietnamese
Direct Material $3.20 $4.20
Direct labor XXXXXXXXXX
VCC’s controller believes the traditional product-costing system may be providing misleading
cost information. She has developed an analysis of the 2018 budgeted manufacturing-overhead
costs shown in the following chart.
Activity Cost Driver Budgeted Activity Budgeted Cost
Purchasing Purchase orders 1,158 $ 579,000
Material handling Setups 1,800 720,000
Quality control Batches XXXXXXXXXX,000
Roasting Roasting hours 96,100 961,000
Blending Blending hours 33,600 336,000
Packaging Packaging hours 26,000 260,000
Total manufacturing-overhead cost $3,000,000
Data regarding the 2018 production of Hawaiian and Vietnamese coffee are shown in the
following table. There will be no raw-material inventory for either of these coffees at the
eginning of the year.
Hawaiian Vietnamese
Budgeted sales 2,000 lb. 100,000 lb.
Batch size 500 lb. 10,000 lb.
Setups 3 per batch 3 per batch
Purchase order size 500 lb. 25,000 lb.
Roasting time 5 hr. per 100 lb. 5 hr. per 100 lb.
Blending time .5 hr. per 100 lb. .5 hr. per 100 lb.
Packaging time .2 hr. per 100 lb. .2 hr. per 100 lb.
Required:
1. Determine the company’s predetermined overhead rate using a direct-labor cost as the
single cost driver (5 points).
2. Determine the selling price of one pound of Hawaiian coffee (5 points).
3. Determine the selling price of one pound of Vietnamese coffee (5 points).
4. Develop a new product cost, using an activity-based costing approach, for one pound of
Hawaiian coffee (5 points).
5. Develop a new product cost, using an activity-based costing approach, for one pound of
Vietnamese coffee (5 points).