Accounting Quesions on Conventional and ABC costing system

Like any organizations, farmers faced a lot of challenges in the 21st century. Fiji TV’s
Talk Business features the coffee farmers from the highlands of Guadalcanal and how
this partnership has resulted in the export of high quality coffee beans out of the Solomon
Islands.
Watch their story entitled “COFFEE INDUSTRY- SOLOMON ISLANDS- YouTube” on
www.youtube.com/watch?v=NY9y96ynEVg
Varivao Holdings is a local company in the Solomon Islands that buys Arabian coffee
beans from the farmers and then processed it before selling it to the local market.
Recently, the coffee business is a great success and there are interests from overseas
countries for this coffee. However, at the moment the coffee is sold to the local market in
a one-kilogram package labeled as ‘Solomon Gold’. The two most popular roasts are
medium roast and dark roast. These blends of coffee are so popular in the gourmet coffee
shops in Honiara.
Since the processing of the coffee beans is highly automated, a large portion of the cost is
manufacturing overhead costs. With regards to its direct costs, the major cost is the cost
of the coffee beans (direct materials), while direct labor costs is minimal. The
management accountant of Varivao prices its coffee using a cost-plus pricing strategy by
adding 30 percent to the total manufacturing cost.
Data for 2015 include budgeted manufacturing overhead cost of $1,500,000, which is
currently allocated using the direct labor cost. The budgeted direct labor cost for 2015 is
$300,000. Purchase of coffee beans from farmers is expected to be $3,000,000. The
budgeted direct costs for a 1 kg coffee packet is as follows:
Costs Solomon Gold
Medium Roast
Solomon Gold Dark
Roast
Coffee beans (raw materials) $5.20 $4.20
Direct labor $0.40 $0.40
Varivao’s management accountant has recently attended a public seminar on activitybased
costing system and believes that their conventional costing system may be
providing misleading costing information. Therefore, she has analyzed the 2015 budgeted
manufacturing overhead costs as follows:
23
Activity Cost driver Budgeted
Activity
Budgeted
Cost
Purchasing Purchase orders 579 $289,500
Materials handling Number of setups 900 360,000
Quality control Number of batches 300 72,000
Roasting Roasting hours 48,050 480,500
Blending Blending hours 16,800 168,000
Packaging Packaging hours 13,000 130,000
Total manufacturing overhead cost $1,500,000
Production data for 2015 for the two popular coffee roasts are as follows:
Costs Solomon Gold
Medium Roast
Solomon Gold Dark
Roast
Expected sales 50,000 kg 1,000 kg
Batch size 5,000 kg 250 kg
Setups 2 per batch 2 per batch
Purchase order size 12,500 kg 250 kg
Roasting time 0.5 hour per 50kg 0.5 hour per 50 kg
Blending time 0.25hr. per 50 kg 0.25 hr. per 50 kg
Packaging time 0.05 hr. per 50 kg 0.05 hr. per 50 kg.
Required
(1) Describe the changes in the business environment of the coffee industry in the
Solomon Islands. (4 marks)
(2) Explain TWO factors that might have an effect on the customer value and
shareholder value. (3 marks)
(3) Using Varivao’s current conventional costing system,
(i) Determine its pre-determined overhead rate (make sure you label the rate
correctly). (2 marks)
(ii) Determine the budgeted costs and selling prices of 1 kg packet of the
Solomon Gold medium roast, and Solomon Gold dark roast.(6 marks