UNIVERSIry OF THE PHILIPPINES - LOS BANOS

Depa rtment of Agribusiness Management

College of Economics and Management

Management 213 Activity-Based-Costi ng

Prepared by: Mr. Sergs F. Sancon

JAVA SOURCE !NC., (JSll

Java Source lnc. (JSl), 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 56OO,OOO , 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 55,000,000 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 compant's coffee
products appear below.

Kenya Viet
Dark Select
Direct materials 5 4.50 5 2.90
Direct labor (0.02 hours per bag) s 0.24 s 0.24

that the company's traditional costing system may be providing misleading cost
JSI's controller believes
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:

Expected Activity Expected Cost

Activity Cost Pool Activity Measure for the Year for the Year
Purchasing Purchase orders 2,000 orders 5 560,000
Material handling Number of set-ups 1,000 setups 193,000
Quality control Number of batches s00 batches 90,000
Roasting Roasting hours 95,000 roasting hours 1,045,000
Blending Blending hours 32,000 blending hours 192,000
Packaging Packaging hours 24,0W packaging hours 120,000
Total manufacturing overhead $ 2,2oo,om
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/ Data regarded the o(pected production ofthe Kenya Dark coffee and the VietSelect coffee are presented
below:

Kenya Dark Viet Select

Expected sales 80,(x)o pounds 4,000 pounds
Batch size 5,000 pounds 500 pounds
Setups 2 per batch 2 per batch
Purchase order size 20,000 pounds 500 pounds
Roasting time per 100 pounds 1.5 roasting hours 1.5 roasting hours
Blending time per 10O pounds 0.5 blending hours 0.5 blending hours
Packaging time per 100 pounds 0.3 packaging hours 0.3 packaging hours

Required:

1. Using direct-labor hours as the base for assigning manufacturing overhead cost to products, do the
following:

a. Determine the predetermined overhead rate that will be used during the year.

b. Determine the unit product cost of one pound ofthe Kenya Dark coffee and one pound of the
Viet Select coffee.

2. Using activity-based msting as the basis for assigning manr,rhcturing ouerhead cost to products, do
the following:

a. Determine the total amount of manufacturing overhead cost assigned to the Kenya Dark coffee
and to the Viet Select coffee for the year.

b. Using the data developed in {2a} abovg compute the amount of manufacturing overhead cost
per pound of the (enya Dark coffiee and the Viet Selett coffee. Round off all computations to
the nearest whole cenL

c. Determine the unit product costs of one pound of the Kenya Dark coffee and one pound of the
Viet Select coffee.

3. Write a brief comments explaining what you have found in (1) and (2) above about the implications
to the company of using direct labor hour at the base for assigning manufacturing overhead cost to
products.