Coffee Bean Essay

ST. GREGORY’S UNIVERSITY Coffee Bean, Inc. Managerial Accounting, BU2123, Research Project, Spring 2007 Coffee Bean, Inc. (CBI) 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. CBI currently has 40 different coffees that it offers to gourmet shops in one-pound bags. The major cost of the coffee is the raw coffee beans. However, there is a substantial amount of manufacturing overhead in the company’s predominantly automated roasting, blending 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. CBI prices its coffee at manufacturing cost plus a markup of 30%. If CBI’s coffee prices are significantly higher than the market, adjustments are made to bring CBI’s prices more into alignment with the market. The company competes primarily on the quality of its products, but customers are price conscious as well. For the coming year, CBI’s budget includes estimated manufacturing overhead cost of $3,000,000. CBI assigns manufacturing overhead to products based on 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 $6,000,000 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 many coffee products appear below: Mona Loa $4. 20 0. 30 Malaysian $3. 20 0. 30 Direct Materials Direct Labor (0. 025 hours per bag). CBI’s president is very concerned about lowering profit margins. Several prices have had to be reduced to meet market pressures and other products are selling at good volumes without price adjustments. The president talked with CBI’s controller who believes that the company’s traditional costing system, which uses direct labor costs to allocate manufacturing overhead, may be providing misleading cost 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. Activity Center Cost Driver Purchasing Purchase Orders Materials handling Number of Setups Quality control Number of Batches Roasting Roasting Hours Blending Blending Hours Packaging Packaging Hours Total manufacturing overhead cost: Expected Activity 1,710 orders 1,800 setups 600 batches 96,100 hours 33,500 hours 26,000 hours Expected Cost $ 513,000 720,000 144,000 961,000 402,000 260,000 $3,000,000 Data regarding the expected production of two representative products, Mona Loa and Page 1 of 2 Coffee Bean Malaysian coffee, are presented below. There will be no raw materials inventory for either of these coffees at the beginning of the year. Mona Loa Malaysian 100,000 2,000 Pounds 10,000 500 Pounds 3 3 Per batch 20,000 500 Pounds 1. 0 / 100 1. 0 /100 Hours per pound 0. 5 / 100 0. 5 /100 Hours per pound 0. 1 / 100 0. 1 /100 Hours per pound Expected sales Batch size Setups Purchase order size Roasting time Blending time Packaging time Step into the shoes of the controller and prepare a complete report for the president explaining the results of your research. Compare the two product-costing methods: (1) the currently-used, volume-based method, and (2) an activity-based method. The supporting tables should determine full costs and prices of both products using the two different cost allocation methods. Continue your detailed report to the president by justifying why the company should remain using their present overhead allocation method or to go activity-based costing. Go beyond the accounting issues in your report, mentioning the impact on pricing, volume, and marketing decisions. Support your recommendation with current articles (Use the online resources of the SGU James J. Kelly Library to locate articles within the last year that deal with cost allocation issues). Three to five supporting articles should be sufficient to support your findings. Since this is a formal report, it will require a transmittal memo summarizing your findings. This memo/summary should be supported by a detailed report including tables and references to business/accounting literature. Include a bibliography in APA format. Also, since presidents rarely have time to read the entire article, but are interested in their content, provide an abstract of each citation. Remember: appearance, spelling, grammar count. Adapted from Managerial Accounting, Eight Edition, Garrison & Noreen, Irwin, 1997.