This report analyses the costs associated with two of Coffee Beans Inc. products, Moana Loa and Malaysian blends based on two different costing methodologies, namely the traditional job costing system that the company uses so far and the Activity Based Costing (ABC). ABC provides us with a more detailed and accurate estimation of the real cost of the products and it can serve as the basis for suitable strategic decisions, concerning products mix, pricing, suppliers and market positioning. A major issue that have to be concerned is the discontinuation or not of Malaysian blend. Appropriate recommendations and alternative solutions are being provided in order to facilitate the strategic decision process and help the Board of Directors to go to the right direction that will optimize our product mix, strengthen our position in the market and boost our operating profit.
TABLE OF CONTENTS
Traditional Costing method
Activity Based Costing (ABC)
Comparison Between the Results of Traditional Costing and Activity Based Costing for Coffee Bean Inc.
Traditionally, companies used costing based solely on direct labor or machine hours in order to allocate indirect costs to products. A more recent approach is the Activity Based Costing (ABC) that first accumulates overhead costs for each of the activities of an organization, and then assigns the costs of activities to the products, services, or other cost objects that caused that activity. The present report will investigate the costs structure of two products of Coffee Bean Inc., Moana Loa and Malaysian. Initially, the so far applied traditional method will be presented. Then, the refined costing system of Activity Based Costing will be examined. Following there will be a comparison of the two methods with an effort to locate points that will reveal inconsistencies in costing and subsequent pricing of the products. The aim is Coffee Bean Inc. to identify precisely which drivers dominate the cost of each blend and actively adjust its product mix, pricing, purchasing and marketing strategy. Conclusions and recommendations on possible routes of problems, solutions or strategies to follow will be thoroughly discussed and a crystal clear image of the “cause-effect” relationship of all stages and factors in each blend will be drawn.
Traditional Costing method
The first method of costing used to evaluate the Coffee Bean products’ costs and profitability is the traditional costing method. This provides an initial base for comparison in order to assess the Malaysian and Moana Loa coffee blends against each other. The traditional costing method classifies all manufacturing costs of products into three big categories, these being direct materials, direct labor and manufacturing overhead. Direct materials and labor are straightforward in the case of Coffee Bean Inc. Company data provided breakdown these costs for both coffee blends in question. On the other hand, the third category of manufacturing overhead may not always be as accurate as it is applied based on a weighted average for the products. The calculation of all three categories is discussed in the following paragraphs. Data is provided for the direct cost of Moana Loa and Malaysian coffees as well as the direct labor costs (Table 1). In addition, a prediction of production in pounds for each product is 100.000 and 2.000 respectively. Given the above inputs, the following direct costs are extracted: Moan Loa Direct Material Cost
Moan Loa Direct Labor Cost
Malaysian Direct Material Cost
Malaysian Direct Labor Cost
The manufacturing overhead budget provides us with a schedule of costs for coffee bean products including all other costs other than direct labor and materials. In order to determine the indirect manufacturing costs, the overhead rate used to charge all the indirect...
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