Activity-Based Costing and Pricing [L07] Java Source, Inc. (JSI), is a processor and distributor…

Activity-Based Costing and Pricing [L07]

Activity-Based Costing and Pricing [L07] Java Source, Inc. (JSI), is a processor and distributor of...

Java Source, Inc. (JSI), 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. 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. The company uses relatively little direct labor.

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%, with some adjustments made 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 will 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.

Kenya Dark

Viet Select

Direct materials



Direct labor (0.02 hours per bag)



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

Expected Activity for the Year

Expected Cost for the Year


Purchase orders

2,000 orders

$ 560,000

Material handling

Number of setups

1,000 orders


Quality control

Number of batches

500 batches



Roasting hours

95,000 roasting hours



Blending hours

32,000 blending hours



Packaging hours

24,000 packaging hours


Total manufacturing overhead cost


Data regarding the expected production of Kenya Dark and Viet Select coffee are presented below.

Kenya Dark

Viet Select

Expected sales

80,000 pounds

4,000 pounds

Batch size

5,000 pounds

500 pounds


2 per batch

2 per batch

Purchase order size

20,000 pounds

500 pounds

Roasting time per 100 pounds

1.5 roasting hours

1.5 roasting hours

Blending time per 100 pounds

0.5 blending hours

0.5 blending hours

Packaging time per 100 pounds

0.3 packaging hours

0.3 packaging hours

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