Finance and Accounting

Finance and Accounting

Coursework assignment for Quantitative Analysis for Managers moudel
Case study: Coffee Blend Limited

Coffee Blend Limited (CBL) 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. CBL currently has 40 different coffees that it sells to gourmet shops in one-kilo bags. The major cost of the coffee is raw materials. However, the company’s predominantly automated roasting, blending and packing process requires a substantial amount of manufacturing overhead. The company uses relatively little direct labour.

Some of CBL’s coffees are very popular and sell in large volumes, while a few of the newer blends have very low volumes. CBL prices its coffee at manufacturing cost plus a mark-up of 30%. If CBL’s prices for certain coffees are significantly higher than market, adjustments are made to bring CBL’s prices more into alignment with the market since customers are somewhat price conscious.

For the coming year, CBL’s budget includes estimated manufacturing overhead cost of £3,000,000. CBL assigns manufacturing overhead to products on the basis of direct labour hours. The expected direct labour cost totals £600,000, which represents 50,000 hours of direct labour time.

The expected costs for direct materials and direct labour for one-kilo bags of two of the company’s coffee products appear below.

Kopi Lua Costa Rica
Direct materials £4.20 £3.20
Direct labour (0.025 hours per bag) £0.30 £0.30
CBL’s new marketing manager believes that the company’s traditional costing system may be providing misleading cost information. To determine whether or not this is correct, the marketing manager has obtained an analysis of the year’s expected manufacturing overhead costs, as shown in the following table:
Activity Cost Pool Activity Measure Expected Activity for the Year Expected Cost for the year £
Purchasing Purchase orders 1,710 orders 513,000
Material handling Number of setups 1,800 set ups 720,000
Quality control Number of batches 600 batches 144,000
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 manufacturing overhead cost ————–
£3,000,000
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Data regarding the expected production of Kopi Lua and Costa Rica coffee are presented below.

Kopi Lua Costa Rica
Expected sales 100,000 kilos 2,000 kilos
Batch size 10,000 kilos 500 kilos
Setups 3 per batch 3 per batch
Purchase order size 20,000 kilos 500 kilos
Roasting time per 100 kilos 1.0 hour 1.0 hour
Blending time per 100 kilos 0.5 hour 0.5 hour
Packaging time per 100 kilos 0.1 hour 0.1 hour

As the newly appointed marketing manager, produce a report to the board detailing the following:
1. Using direct labour hours as the base for assigning manufacturing overhead cost to products:
a) Determine the predetermined overhead rate that will be used during the year.
b) Determine the unit product cost of one kilo of the Kopi Lua coffee and one kilo of the Costa Rica 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 the Kopi Lua coffee and to the Costa Rica coffee for the year.
b) Using the data developed in (2a) above, compute the amount of manufacturing overhead cost per kilo of the Kopi Lua coffee and the Costa Rica coffee. Round all computations to the nearest two decimals.
c) Determine the unit product cost of one kilo of the Kopi Lua coffee and one kilo of the Costa Rica coffee.
3. Explain to the board of CBL what you have found in (1) and (2) above and discuss the implications to the company of using direct labour as the base for assigning manufacturing overhead cost to products.
4. By measuring the resources consumed by products (and other cost objects) an ABC system provides a much better basis for decision making than a traditional cost accounting system that spreads overhead costs around without much regard for what might be causing the overhead. A well designed ABC system provides managers with estimates of potentially relevant costs that can be a very useful starting point for management analysis. Discuss this statement with regard to Coffee Blend Limited and other relevant academic literature.

 

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