I am having trouble answering 3a and 3b of Problem 5-56 on the attached document.

I am having trouble answering 3a and 3b of Problem 5-56 on the attached document.

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Problem 5-56
Kona
Malaysian
Direct material
$3.20
$4.20
Direct labor
0.30
0.30
Activity
Cost Driver
Budgeted Activity
Budgeted Cost
Purchasing
Purchase orders
1,158
$579,000
Material handling
Setups
1,800
$720,000
Quality control
Batches
720
$144,000
Roasting
Roasting hours
96,100
$961,000
Blending
Blending hours
33,600
$336,000
Packaging
Packaging hours
26,000
$260,000
Total manufacturing-overhead cost
$3,000,000
Kona
Malaysian
Budgeted sales
2,000 lb.
100,000 lb.
Batch size
500 lb.
10,000 lb.
Setups
3 per batch
3 per batch
Purchase order size
500 lb.
25,000 lb.
Roasting time
1 hr. per 100 lb.
1 hr. per 100 lb.
Blending time
.5 hr. per 100 lb.
.5 hr. per 100 lb.
Packaging time
.1 hr. per 100 lb.
.1 hr. per 100 lb.
1. (a.)
WORLD GOURMET COFFEE COMPANY
Predetermined overhead rate using direct-labor as
single cost driver:
Total manufacturing overhead cost
$3,000,000
Budgeted direct-labor cost
$600,000
Overhead per direct-labor dol ar
$5.00
Total manufacturing overhead /Budgeted direct labor cost
1. (b)
Ful product costs and sel ing prices per one-pound
bag:
Kona
Malaysian
Direct material
$3.20
$4.20
Direct labor
0.30
0.30
Overhead
1.50
1.50
Direct Labor * Overhead per direct-labor dol ar
Ful product cost
$5.00
$6.00
Markup
$1.50
$1.80
Ful Product Cost * 30% Markup
Sel ing price
$6.50
$7.80
Ful Product Cost + Markup
2.
WORLD GOURMET COFFEE COMPANY
Budgeted Manufacturing-Overhead Costs
Budgeted
Budgeted
Unit
Activity
Cost Driver
Activity
Cost
Cost
Purchasing
Purchase orders
1,158
$579,000
$500
Budgeted Cost / Budgeted Activity
Material handling
Setups
1,800
$720,000
$400
Quality control
Batches
720
$144,000
$200
Roasting
Roasting hours
96,100
$961,000
$10
Blending
Blending hours
33,600
$336,000
$10
Packaging
Packaging hours
26,000
$260,000
$10
Total manufacturing-overhead cost
$3,000,000
Kona
Malaysian Cof ee
Kona Malaysian
Budgeted sales (lb.)
2000
100000
Standard cost per pound:
Standard cost per pound:
Batch size
500
10000
Direct material
$3.20
Direct material
$4.20
Number of batches
4
10 Budgeted sales in lb. / Batch size
Direct labor
$0.30
Direct labor
$0.30
Set ups per batch
3
3
Purchasing
$1.00
Purchasing
$0.02
(Unit Cost for Activity * Number of Purchase Orders for Product) / Budgeted Sales
Number of set ups
12
30 Number of batches * Set ups per batch
Material handling
$2.40
Material handling
$0.12
(Unit Cost for Activity * Number of Set Ups for the product) / Budgeted Sales
Purchase order size (lb.)
500
25000
Quality control
$0.40
Quality control
$0.02
(Unit Cost for Activity * Number of Batches for the product) / Budgeted Sales
Number of purchase orders
4
4 Budgeted sales in lb. / Purchase order size in lb.
Roasting
$0.10
Roasting
$0.10
(Unit Cost for Activity * Number of Roasting Hours for the product) / Budgeted Sales
Roasting time per 100 lb.
1
1
Blending
$0.05
Blending
$0.05
(Unit Cost for Activity * Number of Blending Hours for the product) / Budgeted Sales
Roasting time
20
1000 (Roasting time per 100 lb. * Budgeted Sales in lb.) / 100
Packaging
$0.01
Packaging
$0.01
(Unit Cost for Activity * Number of Packaging Hours for the product) / Budgeted Sales
Blending time per 100 lb.
0.5
0.5
Total cost
$7.46
Total cost
$4.82
Blending time
10
500 (Blending time per 100 lb. * Budgeted Sales in lb.) / 100
Packaging time
for 100 lb.
0.1
0.1
Packaging time
2
100 (Packaging time per 100 lb. * Budgeted Sales in lb.) / 100
3(a).
What are the implications of activity based costing system with respect to the use
of direct labor as a basis for applying overhead to products?
3(b).
What are the implications of activity based costing system with respect to the use
of existing product-costing system as the basis for pricing?
“World Gourmet Cof ee Company (WGCC) is a distributor and processor of dif erent blends of cof ee. The company buys cof ee beans from around the world and roasts, blends, and packages them for resale. WGCC cur ently has 15 dif erent cof ees that it of ers to gourmet shops in one-pound bags. The major cost is raw materials; however, there is a
substantial amount of manufacturing overhead in the predominately automated roasting and packaging process. The company uses relatively lit le direct labor.
Some of the cof ees are very popular and sel in large volumes, while a few of the newer blends have very low volumes. WGCC prices its cof ee at ful product cost, including al ocated overhead, plus a markup of 30 percent. If prices for certain cof ees are significantly higher than market, adjustments are made. The company competes primarily on the
quality of its products, but customers are price-conscious as wel .
Data for the 20×1 budget include manufacturing overhead of $3,000,000, which has been al ocated on the basis of each product’s direct-labor cost. The budgeted direct-labor cost for 20×1 totals $600,000. Based on the sales budget and raw-material budget, purchases and use of raw materials (mostly cof ee beans) wil total $6,000,000.
The expected prime costs for one-pound bags of two of the company’s products are as fol ows:
WGCC’S control er believes the traditional product-costing system may be providing misleading cost information. She has developed an analysis of the 20×1 budgeted manufacturing-overhead costs shown in the fol owing chart:
Data regarding the 20×1 production of Kona and Malaysian cof ee are shown in the fol owing table. There wil be no raw-material inventory for either of these cof ees at the beginning of the year.
Required:
1. Using WGCC’s cur ent product-costing system:
a. Determine the company’s predetermined overhead rate using direct-labor as the single cost driver.
b. Determine the ful product costs and sel ing prices of one pound of Kona cof ees and one pound of Malaysian cof ee.
2. Develop a new product cost, using an activity-based costing approach, for one pound of Kona cof ee and one pound of Malaysian cof ee.
3. What are the implications of the activity-based costing system with respect to
a. The use of direct labor as a basis for applying overhead to products?
b. The use of the existing product-costing system as the basis for pricing?” (Hilton, 2011, p. 218-219).

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Brian Carr
Exercise III-3
“For each of the following independent cases, use the equation method to compute the economic order quantity” (Hilton, 2011, p. 784).
Case A
Case B
Case C
Annual requirement (in units)
13,230
1,681
560
Cost per order
$250
$40
$10
Annual holding cost per unit
6
20
7
Case A
EOQ =
√ ((2)(13,230)(250)) / (6)
√ (6,615,000) / (6)
√(1,102,500)
EOQ =
1050 Units
Case B
EOQ =
√ ((2)(1,681)(40)) / (20)
√ (134,480) / (20)
√(6,724)
EOQ =
82 Units
Case C
EOQ =
√ ((2)(560)(10)) / (7)
√ (11,200) / (7)
√(1,600)
EOQ =
40 Units
References:
Hilton, R. W. (2011). Managerial accounting: Creating value in a dynamic business environment (9th ed.). New York, NY: McGraw-Hill/Irwin.
Economic Order Quantity = √ ((2)(Annual requirement)(Cost per order)) / (Annual holding cost per unit)
Economic Order Quantity = √ ((2)(Annual requirement)(Cost per order)) / (Annual holding cost per unit)
Economic Order Quantity = √ ((2)(Annual requirement)(Cost per order)) / (Annual holding cost per unit)

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