Comparison of ABC System and Current Product Costing at Coffee

To: Mona From: Management Accountant Date: March 7, 2023 RE: ABC System vs Current Product Costing System Coffee Bean Inc. is a distribution company, they buy and sell various types of coffee beans from all around the world. Mona, the controller of Coffee Bean Inc. believes that their current product costing system could be providing the company with misleading information. Mona is trying to determine whether the company should use the ABC approach or the current costing approach. 1.Full product costs and selling prices of one pound of Mona Loa coffee and one pound of Malaysian coffee under the current costing approach. Overhead rate= total factory cost/direct labour hours =$ 3,000,000/$600,000 =$5 Mona LoaMalaysian Direct Materials4.23.2 Direct Labour0.30.3 Factory Overhead55 Total Cost$9.5$8.5 Selling prices= product cost + 30% markup Mona Loa Markup=9.5 *0.3= $2.85 Selling price= 9.5+2.85= $12.35 Malaysian Markup= 8.5*0.3= $2.55 Selling price= 8.5+2.55= $11.05 Mona Loa's product cost is $9.5 whereas Malaysian's product cost is 8.5, leaving the difference in full product cost between Mona Loa and Malaysian to be $1. The difference in selling price between Mona Loa and Malaysian with the 30% markup is $1.30 because the selling price for Mona Loa is $12.35 whereas the selling price for Malaysian is $11.05.