Part 1: Supply the answer.

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 offers a large variety of different coffees that sells to gourmet shops in one-pound
bags. The major cost of the coffee is raw materials. However, the company's predominantly
automated roasting, blending and packaging processes require a substantial amount of
manufacturing overhead. The company uses relatively little direct labor. Some of the CBI’s
coffees are very popular and sell in large volume, while a few of the newer blends sell in very
low volumes.
For the coming year, CBI’s budget includes manufacturing overhead cost of P 3,000,000.
CBI assigns manufacturing overhead to products on the basis of direct-labor hours. The expected
direct labor cost total P 600,000 which represents 50,000 hours of direct labor time.
The expected costs for direct materials and direct labor for one-pound bags of two of the
company’s products appear below:
Mona Loa Malaysian
Direct materials P 4.20 P 3.20
Direct labor (.025 hours per bag) .30 .30

CBI’s controller believes that the company’s traditional costing system 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 Cost Pool Activity Measure Expected Activity for Expected Cost
the Year for the Year

Purchasing Purchase orders 1,710 hours 513,000

Material handling Number of setups 1,800 setups 720,000
Quality control Number of batches 600 batches 144000
Roasting Roasting hours 96,100 roasting hours 961,000
Blending Blending hours 33,500 blending hours 402,000
Packaging Packaging hours 26,000 packaging hours 260,000
Total overhead 3,000,000
cost

Data regarding the expected production of Mona Loa and 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
Expected sales 100,000 pounds 2,000 pounds
Batch size 10,000 pounds 500 pounds
Setups 3 per batch 3 per batch
Purchase order size 20,000 pounds 500 pounds
Roasting time per 100 pounds 1.0 roasting hours 1.0 roasting hours
Blending time per 100 pounds 0.5 blending hours 0.5 blending hours
Packaging time per 100 pounds 0.1 packaging hours 0.1 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 of the Mona Loa coffee and one
pound of the Malaysian coffee.
2. Using activity-based costing as the basis for assigning manufacturing overhead cost to
products, do the following:
a. Determine the total amount of manufacturing overhead cost assigned to Mona
Loa coffee and Malaysian coffee for the year.
b. Using the data developed in 2(a) above, compute the amount of manufacturing
overhead cost per pound of the Mona Loa coffee and the Malaysian coffee. Round
all computations to the nearest whole cent.
c. Determine the unit product cost of one pound of the Mona Loa coffee and one
pound of the Malaysian coffee.
3. Write a brief memo to the president of CBI explaining what you have found in parts (1)
and (2) above and discuss the implications to the company when using direct labor as the
base for assigning manufacturing overhead cost to products.

Solution:
1. Predetermined rate = Budgeted FOH/ direct labor hours
= 3,000,000/ 50,000 hours
= 60 per direct labor hour

Mona Loa Malaysian

DM 4.20 3.20

DL .30 .30

AFOH .025 x 60 = 1.5 1.50

Total 6 5
2.
Activity Cost Activity Expected Activity Expected Cost Predetermined
Pool Measure for the Year for the Year rate (FOH)

Purchasing Purchase orders 1,710 order 513,000 513,000/1,710 =

300/order
Material Number of 1,800 setups 720,000 720,000/180,000
handling setups = 400/ set up
Quality control Number of 600 batches 144000 144,000/600 =
batches 240/ batch
Roasting Roasting hours 96,100 roasting 961,000 961,000/96,100
hours = 10/ hr
Blending Blending hours 33,500 blending 402,000 402,000/33,500
hours = 12/ hr
Packaging Packaging hours 26,000 packaging 260,000 260,000/26,000
hours = 10/hr
Total overhead 3,000,000
cost

Cost Pool Predetermined Mona Loa Malaysian

Rate
Purchasing 513,000/1,710 = 100,000/20,000 = 5 2,000/500 = 4 times x
300/order times x 300 = 1,500 300 = 1,200
Material handling 720,000/180,000 = 100,000/10,000 = 10 2,000/500 = 4 x 400 =
400/ set up x 400 = 4,000 x 3 set 1,600 x 3 = 4,800
ups = 12,000
Quality control 144,000/600 = 240/ 100,000/10,000 = 10 2,000/500 = 4 batches
batch batch x 240 = 2,400 x 240 = 960
Roasting 961,000/96,100 = 100,000/100 = 1,000 2,000/100 = 20 x 10 =
10/ hr
 x 10 = 10,000 200
Blending 402,000/33,500 = 100,000/100 = 1,000 2,000/100 = 20 x .5 x
12/ hr x .5 x 12 = 6,000 12 = 120
Packaging 260,000/26,000 = 100,000/100 = 1,000 2,000/100 = 20 x .1 x
10/hr x .1 x 10 – 1,000 10 = 20

Total overhead 32,900 7,300

Mona Loa Malaysian

DM 4.20 3.20

DL .30 .30

AFOH 32,900/100,000 = .329 7,300/2,000 = 3.65

Total 4.829 7.15

Part 2: MCQ
1. Uratex Company manufactures a variety of classroom chairs. Its job costing system uses an
activity-based approach. There are two direct cost categories (direct materials and direct labor)
and three indirect cost pools. The cost pools represent three activity areas at the plant.
Manufacturing Budgeted Cost for Cost Driver Used as Cost-Allocation
Activity Area 2020 Allocation Base Rate
Materials handling P 200,000 Parts P .25
Cutting 2,000,000 Parts 2.50
Assembly 2,000,000 Direct labor hours 25,000

Two styles of chairs were produced in March, the high school chair, and the college chair. Their
quantities, direct material costs, and other data for March 2020 are as follows:
Units Produced Direct Material Number of Direct
Costs Parts Manufacturing
Labor Hours
High school 5,000 P 600,000 100,000 7,500
chair
 College chair 100 25,000 3,500 500

The direct labor rate is P 20 per hour. Assume no beginning or ending inventory.
What are the unit cost of high school chair and the college chair?
a. P 240.50 and P 571.75 respectively
b. P 242.50 and P 570.25 respectively
c. P 252.50 and P 571.25 respectively
d. P 242.50 and P 571.25 respectively
Solution:
High school chair:
Direct materials P 600,000
Direct labor (7,500 x 20) 150,000
Overhead:
Material handling (100,000 x P.25) P 25,000
Cutting (100,000 x P 2.50) 250,000
Assembly (7,500 x 25) 187,500 462,500
Total cost P 1,212,500
Units produced 5,000
Unit cost P 242.50

College chair:
Direct materials P 25,000
Direct labor (500 x P 20) 10,000
Overhead:
Material handling (3,500 x P .25) P 875
Cutting (3,500 x P 2.50) 8,750
Assembly (500 x P 25) 12,500 22,125
Total cost P 57,125
Units produced 100
Unit cost P 571.25
2. The Manila Company manufactures and sells packaging machines. It recently used an activity
based approach to refine the job costing system at its Bulacan plant. The resulting job costing
system has one direct cost category (direct materials and four indirect manufacturing cost pools.
These four indirect cost pools and their allocation bases are:
 Indirect Cost Allocation Base Budgeted Cost
Manufacturing Cost Allocation Rate
Pool
Material handling Component parts P 8 per part
Machining Machine hours P 68 per hour
Assembly Assembly hours P 75 per hour
Inspection Inspection hours P 104 per hour

Manila Company recently sold 50 can-packaging machines to Ilocos Company. Each machine
has direct material costs of P 3,000 requires 50 component parts, 12 machine hours, 15
assembly-hours and 4 inspection hours.
Manila Company’s previous costing system had one direct-cost category (direct materials) and
one indirect cost category (manufacturing overhead allocated at the rate of P 100 per assembly
hour).
In comparison to the traditional costing system used by Manila Company, the total
manufacturing cost of the machines sold under the ABC is:
a. P 114,850 higher
b. P 141,850 lower
c. P 114,950 higher
d. Equal
Solution:
Traditional Costing System:
Direct materials (50 x P 3,000) P 150,000
Overhead (50 x 19) x P 100 75,000
Total cost P 225,000

Activity Based Costing System:

Direct materials P 150,000
Overhead:
Material handling (50 x 50) x P 8 20,000
Machining (50 x 12) x P 68 40,800
Assembly (50 x 15) x P 75 56,250
Inspection (50 x 14) x P 104 72,800
Total cost P 339,850
 Higher P 114,850

3. Believing that its traditional cost system may be providing misleading information. BMW
Company s considering an activity based costing approach. It now employs a full cost system
and has been applying its manufacturing overhead on the basis of machine hours.
The company plans on using 50,000 direct labor hours and 30,000 machine hours in the
coming year. The following data show the manufacturing overhead that is budgeted.
Activity Cost Driver Budgeted Activity Budgeted Cost
Materials handling No. of parts 6,000,000 P 720,000
handled
Set up costs No. of setups 750 315,000

Machining costs Machine hours 30,000 540,000

Quality control No. of batches 500 225,000

Costs, sales and production data for one of the company’s product for the coming year
are as follows:
Prime costs:
Direct material cost per unit P 4.40
Direct labor cost per unit, .05 direct labor
Hours @ P 15 per hour 0.75
Sales and production data:
Expected sales 20,000 units
Batch size 5,000 units
Setups 2 per batch
Total parts per finished unit 5 parts
Machine hours required 80 machine hours per batch
If the company employs an activity based costing system, the cost per unit for the product
prescribed for the coming year will be:
a. P 6.00
b. P 6.08
 c. P 6.21
d. P 6.30
Solution:
Overhead rates:
Material handling (720,000/6,000,000 parts) P .12
Set up costs (315,000/750 set ups) 420
Machining costs (540,000/ 30,000 hours) 18.00
Quality control (225,000/500 batches) 450
Overhead costs:
Material handling (20,000 units x 5 parts x P .12) P 12,000
Set-up costs activity (20,000 units/ 5,000 x 2 set ups s P 420) 3,360
Machining activity (20,000 units/ 5,000 x 80 hrs) x P 18 5,760
Quality control activity (20,000 units/5,000 x P 450) 1,800
Total P 22,920

Overhead cost per unit (P 22,920/20,000 units) P 1.15

Direct material cost per unit 4.40
Direct labor cost per unit .75
Total unit cost P 6.30

4. Tamiya Corporation has used a traditional costing system to apply quality control costs
uniformly to all products at a rate of 14.5% of direct labor cost. Monthly direct labor cost for its
Product X is P 275,000. In an attempt to distribute quality control costs more equitable, Tamiya
is considering activity based costing (ABC). The June data shown below have been gathered for
Product X.
Activity Cost Driver Cost Rates Quantity
Material handling Type of materials P 115 per type 12 types
Inspection Number of units P 1.40 per unit 17,500 units
Product certification Per order 770 per order 25 orders

What is the monthly quality control assigned to Product X using the ABC?
a. P 686.40 per order
b. P 5,255 higher than the traditional costing system.
c. P 85,000
d. P 5,255 lower than the traditional costing system.
Solution:
ABC:
 Material handling (115 x 12) P 1,380
Inspection (1.40 x 17,500) 24,500
Product certification (770 x 25) 19,250 P 45,310
Traditional costing (275,000 x 14.5%) 39,875
ABC higher than the traditional costing by P 5,255