World Gourmet Coffee Company (WGCC) 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 resale. WGCC currently has 15 different coffees that it offers to gourmet shops in one-pound bags. 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 relatively 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. WGCC prices its coffee at full product cost, including allocated overhead, plus a markup of 30 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 20x1 budget include manufacturing overhead of $18,207,520, which has been allocated on the basis of each product's direct-labor cost. The budgeted direct-labor cost for 20x1 totals $1,820,752. Based on the sales budget and raw-material budget, purchases and use of raw materials (mostly coffee beans) will total $6,900,000. The expected prime costs for one-pound bags of two of the company's products are as follows: Malaysian $5.00 0.30 Direct material Direct labor WGCC's controller believes the traditional product-costing system may be providing misleading cost information. She has developed an analysis of the 20x1 budgeted manufacturing-overhead costs shown in the following chart. Kona $4.00 0.30 Activity Purchasing Material handling Quality control Roasting Blending Packaging Total manufacturing-overhead cost. Budgeted sales Batch size Setups Purchase order size Roasting time. Blending time Packaging time Cost Driver Purchase orders. Setups Batches Roasting hours Blending hours Packaging hours Kona 4,200 lb. 1,050 lb. 3 per batch 1,050 lb. Budgeted Activity 2,591 4,040 1,660 Data regarding the 20x1 production of Kona and Malaysian 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. 1 hr. per 100 lb. 0.5 hr. per 100 lb. 0.1 hr. per 100 lb. 203,200 71,600 57,500 Malaysian 111,000 lb. 22,200 lb. 3 per batch 55,500 lb. Budgeted Cost 1 hr. per 100 lb. 0.5 hr. per 100 lb. 0.1 hr. per 100 lb. $ 3,161,020 3,898,600 846,600 6,299,200 2,219,600 1,782,500 $18,207,520

World Gourmet Coffee Company (WGCC) 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 resale. WGCC currently has 15 different coffees that it offers to gourmet shops in one-pound bags. 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 relatively 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. WGCC prices its coffee at full product cost, including allocated overhead, plus a markup of 30 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 20x1 budget include manufacturing overhead of $18,207,520, which has been allocated on the basis of each product's direct-labor cost. The budgeted direct-labor cost for 20x1 totals $1,820,752. Based on the sales budget and raw-material budget, purchases and use of raw materials (mostly coffee beans) will total $6,900,000. The expected prime costs for one-pound bags of two of the company's products are as follows: Malaysian $5.00 0.30 Direct material Direct labor WGCC's controller believes the traditional product-costing system may be providing misleading cost information. She has developed an analysis of the 20x1 budgeted manufacturing-overhead costs shown in the following chart. Kona $4.00 0.30 Activity Purchasing Material handling Quality control Roasting Blending Packaging Total manufacturing-overhead cost. Budgeted sales Batch size Setups Purchase order size Roasting time. Blending time Packaging time Cost Driver Purchase orders. Setups Batches Roasting hours Blending hours Packaging hours Kona 4,200 lb. 1,050 lb. 3 per batch 1,050 lb. Budgeted Activity 2,591 4,040 1,660 Data regarding the 20x1 production of Kona and Malaysian 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. 1 hr. per 100 lb. 0.5 hr. per 100 lb. 0.1 hr. per 100 lb. 203,200 71,600 57,500 Malaysian 111,000 lb. 22,200 lb. 3 per batch 55,500 lb. Budgeted Cost 1 hr. per 100 lb. 0.5 hr. per 100 lb. 0.1 hr. per 100 lb. $ 3,161,020 3,898,600 846,600 6,299,200 2,219,600 1,782,500 $18,207,520

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter10: Decentralization: Responsibility Accounting, Performance Evaluation, And Transfer Pricing

Section: Chapter Questions

Problem 15E: Mossfort, Inc., has a division in Canada that makes long-lasting exterior wood stain. Mossfort has...

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