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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 companys predominantly automated roasting, blending and
packaging processes require a substantial amount of manufacturing overhead. The
company uses relatively little direct labor. Some of JSIs 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 mark-up of 25%, with some
adjustments made to keep the companys prices competitive. For the coming year,
JSIs budget includes estimated manufacturing overhead cost of P2,200,000. JSI
assigns manufacturing overhead to products on the basis of direct labor hours. The
expected direct labor cost totals P600,000, 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 P5,000,000 of raw materials during the year. The
expected costs for direct materials and direct labor for one-pound bags of two of the
companys coffee products appear below.
JSIs controller believes that the companys 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 years expected manufacturing
overhead costs, as shown in the following table:
Activity Cost Activity Measure Expected Activity for Expected
Pool the year Cost for the
year
Purchasing Purchase orders 2,000 orders P560,000
Material Number of setups 1,000 setups 193,000
handling
Quality control Number of 500 batches 90,000
batches
Roasting Roasting hours 95,000 roasting 1,045,000
hours
Blending Blending hours 32,000 blending 192,000
hours
Packaging Packaging hours 24,000 packaging 120,000
hours
TOTAL MFG. OH P2,200,000
Data regarding the expected production of Kenya Dark and Viet Select coffees are
presented below.