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# Gourmet Specialty Coffee Company -Activity based costing

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Budgeted sales ............................................................................... 2,000 lb. 100,000 lb.
Batch size ...................................................................................... 500 lb. 20,000 lb.
Setups ........................................................................................... 3 per batch 3 per batch
Purchase order size ........................................................................ 500 lb. 50,000 lb.
Roasting time ................................................................................. 1 hr. per 200 lb. 1 hr. per 200 lb.
Blending time ................................................................................. .5 hr. per 200 lb. .5 hr. per 200 lb.
Packaging time ............................................................................... .1 hr. per 200 lb. .1 hr. per 200 lb.

Required:

1. Using GSCC's current product-costing system:
a. Determine the company's predetermined overhead rate using direct-labor cost as the single
cost driver.
b. Determine the full product costs and selling prices of one pound of Jamaican coffee and one
pound of Colombian coffee.

2. Develop a new product cost, using an activity-based costing approach, for one pound of Jamaican
coffee and one pound of Colombian coffee.

3. What are the implications of the activity-based costing system with respect to:
a. The use of direct labor as a basis for applying overhead to products?
b. The use of the existing product-costing system as the basis for pricing?

#### Solution Preview

See attached Excel file.

I have computed the required amounts in Excel (click on cells to see computation) so you can ...

#### Solution Summary

I have computed the required amounts in Excel (click on cells to see computation) so you can have a template for other similar problems. You have to compute the number of batches and hours for each product in order to apply overhead so this is an added step that you usually don't need with ABC problems. So, you compute rate, activity for the sales levels and then you can apply overhead. Implications of using ABC versus traditional are given (few sentences).

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