Question description

HOMEWORK PROBLEM 6-1

ABC Costing
High Mountain Coffee Co. is a processor and distributor of
different blends of quality coffee. The company buys beans from around the
world and roasts, blends and packages them for resale. There are presently 15
different flavors which are sold to gourmet shops in one pound bags. The major
cost is raw materials; however, there is substantial amount of manufacturing
overhead in the product. This relates to the high level of automation in the
roasting and packing. The company uses very little direct labor.
Some of the
flavors are very popular and sell in large volumes while a few newer blends
have very low volumes. High Mountain prices its coffee at full product cost
including allocated overhead plus a markup of 30%. High Mountain competes with
comparable qualities but customers are cost conscience.
Data for the
2011 budget includes manufacturing overhead of $3,000,000; direct labor of
$600,000, and raw materials of $6,000,000. Total plant production is estimated
to be 3,000,000 pounds of coffee.
The expected
prime costs for one pound bags of the two following products are as follows:

KAYAKER’S DELIGHT

BRUNDAGE BLENDED

DIRECT MATERIAL

$3.20

$4.20

DIRECT LABOR

$.30

$.30

High
Mountain has also developed the following budgeted manufacturing overhead
information for 2011.

ACTIVITY

COST
DRIVER

BUDGETED
ACTIVITY

BUDGETED
COST

PURCHASING

PURCHASE ORDERS

1,158

$579,000

MATERIAL HANDLING

SETUPS

1,800

$720,000

QUALITY CONTROL

BATCHES

720

$144,000

ROASTING

ROASTING HOURS

96,100

$961,000

BLENDING

BLENDING HOURS

33,600

$336,000

PACKAGING

PACKAGES

260,000

$260,000

TOTAL MFG OVERHEAD

$3,000,000

Data regarding the 2011 production of Kayaker’s and Brundage
coffee are shown in the following table. There will be no raw material
inventory for either of these coffees at the beginning of the year.

KAYAKER’S

BRUNDAGE

BUDGETED SALES

2,000 LBS

100,000
LBS

BATCH SIZE

500 LBS

10,000 LBS

SETUPS

3

5

PURCHASE
ORDER SIZE

500 LBS

25,000 LBS

ROASTING
TIME

1 HR/100
LBS

1 HR/100
LBS

BLENDING
TIME

.5 HR/100
LBS

.5 HR/100
LBS

PACKAGING

1 LB PER
PACKAGE

1 LB PER
PACKAGE

Required:
1. Calculate the overhead
allocation rate for each blend using direct labor dollars as the driver.
2. Calculate the overhead
allocation rate for each blend assuming number of pounds is the driver.
3. Calculate the overhead allocation