Coffee Bean Inc Essay

1108 Words5 Pages
Conclusion: Coffee bean Inc. Should employ Activity Based Costing as opposed to their single allocation rate costing method. Activity based costing is more complex and will take more time and effort from the finance and accounting departments however it will help to avoid over-costing and under-costing of their current products as well as lead to more accurate cost assignment. As discussed earlier Coffee Bean Inc. currently uses a single cost allocation method leading to cost assignment of $6.00 per pound of Moana Loa and $5.00 per pound of Malaysian. However once compared with cost assignment using Activity based costing Moana Loa only costs $4.82 whereas Malaysian costs $7.54. Using the single allocation rate would lead Coffee Bean Inc. to believe that Moana Loa costs them more but also is more profitable with a $1.80 gross profit versus Malaysian which has a gross profit of $1.50. Using the single allocation rate will most likely lead management to make incorrect decisions regarding their different product lines. After recalculating costs and gross profit using the activity based costing method Moana Loa has a gross profit of just $1.45 and Malaysian has a gross profit of $2.26 making it more costly to produce but at the same time more profitable. Coffee bean Inc. in the future should use the Activity Based Costing method rather than their single allocation rate. Activity Based Costing leads to more accurate cost assignment, and will keep management better aware of which products cost the most and which products are the most profitable. Having this information will allow managers to make more informed decisions about how to cut costs, and which product lines they should market more heavily. Coffee Bean Inc. should make the necessary investment to increase their automation through the purchase of a Continuous roasting machine, which will not only
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