Java Source Inc.: Activity-Based Costing
UNIVERSITY OF THE PHILIPPINES – LOS BANOS
College of Economics and Management
Graduate School
Management 213 Activity-Based-Costing
Prepared by: Mr. Sergs F. Sancon
JAVA SOURCE INC., (JSI)
Java Source Inc. (JSI), 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 $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 $5,000,000 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 coffee products appear below.
Kenya
Viet
Dark
Select
Direct materials
$ 4.50 $ 2.90 Direct labor (0.02 hours per bag)
$ 0.24 $ 0.24
JSI’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
College of Economics and Management
Graduate School
Management 213 Activity-Based-Costing
Prepared by: Mr. Sergs F. Sancon
JAVA SOURCE INC., (JSI)
Java Source Inc. (JSI), 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 $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 $5,000,000 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 coffee products appear below.
Kenya
Viet
Dark
Select
Direct materials
$ 4.50 $ 2.90 Direct labor (0.02 hours per bag)
$ 0.24 $ 0.24
JSI’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