Java Source, Inc.
Java Source, Inc. (JSI) is a small, Michigan-based 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 one-pound bags.
The major cost of the coffee is raw materials. However, the company’s predominantly automated
roasting, blending, and packing processes require a substantial amount of manufacturing overhead.
Although the production process started out in the early 1990s as a largely labor-intensive operation, the
gradual switch to automation meant that currently, the company uses relatively little direct labor. The
different blends produced by JSI require varying amounts of time in the roasting and blending processes.
The coffee industry in the US is very competitive, with large players in the market (such as
Starbucks and Green Mountain Coffee Roasters) marketing and selling several varieties of coffee beans.
To differentiate itself from the competition, JSI specializes in many unique luxury blends of coffee. Some
of JSI’s coffees are very popular and sell in large volumes, while a few of the newer blends sell in very
low volumes. JSI prices its coffees at manufacturing cost plus a markup of 25%; however, because
consumers of coffee beans are quite price-sensitive, JSI occasionally makes some adjustments to its costplus pricing scheme 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 expects to 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:
Direct materials.................................................
Direct labor (0.02 hours per bag) ......................
Kenya Dark
$4.50
$0.34
Viet Select
$2.90
$0.34
Kenya Dark competes directly with several dark blends of other producers. JSI’s marketing
manager, Charles Bialetti, has noticed that competitors have been continuously lowering prices of their
respective dark roasts. The average prices of other dark roasts are hovering around $6.40, almost 10
percent less than current prices. Charles is worried about the viability of Kenya Dark, whose profitability
is already in question. Since the JSI plant is already operating at 95% of capacity, Charles is considering
the proposal to eliminate the product in favor of other blends, such as Viet Select, a product recently
introduced by JSI that has few direct competitors.
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 of the
year’s expected manufacturing overhead costs, as shown in the following table:
Activity Cost Pool
Activity Measure
Purchasing.....................................
Purchase orders
Material handling ..........................
Number of setups
Quality control ..............................
Number of batches
Roasting ........................................
Roasting hours
Blending........................................
Blending hours
Packaging......................................
Packaging hours
Total manufacturing overhead ......
Expected Activity
for the Year
2,000 orders
1,000 setups
500 batches
95,000 roasting hours
32,000 blending hours
24,000 packaging hours
Expected Cost
for the Year
$ 560,000
193,000
90,000
1,045,000
192,000
120,000
$ 2,200,000
Data regarding the expected production of the specific coffee blends of Kenya Dark and Viet Select are
presented below.
Expected sales ........................................
Batch size ...............................................
Setups .....................................................
Purchase order size .................................
Roasting time per 100 pounds ................
Blending time per 100 pounds................
Packaging time per 100 pounds..............
80,000 pounds
5,000 pounds
2 per batch
20,000 pounds
1.5 roasting hours
0.5 blending hours
0.3 packaging hours
4,000 pounds
500 pounds
2 per batch
500 pounds
1.5 roasting hours
0.5 blending hours
0.3 packaging hours
Required:
1.
Using JSI’s traditional costing system, calculate the predetermined overhead rate and per unit
product cost for one pound of the Kenya Dark and one pound of the Viet Select coffees. This
would be similar to when we applied the manufacturing overhead based on a traditional cost driver
(i.e. direct labor hours).
POHR = 2,200,000/50,000 = $44.00
Per Unit Product Cost Kenya Dark = 4.50 + 0.34 + 0.02*44 = $5.72
Per Unit Product Cost Viet Select= 2.90 + 0.34 + 0.02*44 = $4.12
2. Determine the per unit product cost for one pound of Kenya Dark coffee and one pound of Viet
Select coffee under the proposed activity-based costing system.
MOH per pound Kenya dark = $0.34
MOH per pound Viet Select = $1.9
Per unit cost Kenya dark = 4.50 + 0.34 + 0.34 = $5.18
Per Unit Product Cost Viet Select= 2.90 + 0.34 + 1.9 = 5.14