The basis of direct-labor
Laurence Coffee Ltd. makes two types of coffee, Gourmet and Espresso, and applies overhead on the basis of direct-labor hours when the traditional costing system is used. Anticipated manufacturing overhead for the upcoming accounting period is $350,000. Information about the products follows.
Product | Selling Price | DM (Coffee beans) | DL | # of Packs estimated and made |
Gourmet | $38 | $5 | 1hr/pack @$12/hr | 20,000 |
Espresso | $60 | $10 | 1.5hrs/pack @$12/hr | 10,000 |
Further investigations show that Brown’s manufacturing overhead of $350,000 consist of:
| Total cost | |
| Setups | $68,000 |
| Machine depreciation | 100,000 |
| Electricity (machinery) | 60,000 |
| Product inspection | 40,000 |
| Maintenance | 80,000 |
,and Brown’s pays factory insurance $2,000 (only for Espresso) annually.
The costs in the table are driven by number of Setups, machine hours worked, and the number of inspections, respectively. Data relevant to these activities follow.
| Product | Number of Setups | Number of inspections |
| Gourmet | 200 | 200 |
| Espresso | 300 | 800 |
Maintenance is performed prior to each production run. Each production run can produce 250 packs of Gourmet coffee or 150 packs of Espresso. Espresso used 45% of the 40,000 total machine hours.
Moreover, 60% of office personnel’s job is to record the results of inspections. Their salary in this coming accounting period is $10,000. They spend rest of their time to deal with customers. (Assume actual activities are the same as estimated activities.)
Required:
1. Calculate the cost per unit of each product using traditional costing method, assuming use
of direct-labor hours to apply overhead to production.
2. Assuming use of activity-based costing, compute the unit costs of the Gourmet and
Espresso coffee. (Please round to two decimals for the unit costs.)
3. By using direct-labor hours as an application base, which product is over-costed and
which product is under-costed? Calculate the total amount of cost distortion for each
product.
4. In January 2017 Britt Coffee house has requested 1,100 packs of Espresso for its coffee
shops. You want the “free marketing” that this will provide so you are willing to offer
them 1,100 packs Espresso at a price equal to your “cost”. Please calculate and explain
any additional Maintenance costs for the 1,100 packs of Espresso.
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