Acct 102 Summer 2009
ABC System Practice Problem
The CEO of Coffee Cups and Tea Bags Company (CCTB) is determined to produce the best coffees and
teas. He learnt about activity-based costing (ABC) systems from an accounting seminar that he attended.
He realized that using traditional product cost systems sometimes lead to misleading cost figures that
could undermine a company’s performance.
Looking at the performance report of its coffee division for the last financial year (2002), he noted that
the division barely broke even. This is surprising as their products have been well received by the market.
The CEO wondered if a more sophisticated cost system could help to explain the division’s poor
performance. He thus directed his division head to implement an ABC cost system for the coffee division.
The division head of CCTB coffee division, Mr. Kafee Black, an avid coffee drinker, had been thinking
of how best to carry out his boss’s orders. In the end, Mr. Black decided to engage an external
consultancy firm to set up an ABC costing system. He chose Wharton Consultants who are really good in
management accounting and offer value-for-money consulting advice.
As a young and bright Wharton consultant, you have recently graduated last year with double degrees,
double majors and are earning double what your peers are earning. To implement an ABC system, you
first obtained your client’s financial statements.
Note: 1 kilogram (kg) = 1000 grams (g)
Coffee Cups and Tea Bags (CCTB) – Coffee Division
Income statement for the year ended 2002
Less: Cost of goods sold
(1) Direct materials pertain to the purchasing cost of coffee beans and cocoa powder used.
(2) Direct labor is the total cost of the direct man-hours hours of the production workers. The direct labor
costs for each kilogram-bag of
is more than 1.5 times that of the other two products as
takes longer to produce than
(3) Total overhead costs are allocated to the three products based on direct labor hours. The
manufacturing overhead rate for 2002 was $240/DLH.
To better understand the business, you relentlessly conducted numerous interviews with other operational