Question

Benton Corporation produces two grades of non-alcoholic wine from grapes that it buys from California growers. It produces and sells roughly 3,000,000 liters per year of a low-cost, high-volume product called CoolDay. It sells this in 600,000 5-liter jugs. Benton also produces and sells roughly 300,000 liters per year of a low-volume, high-cost product called Lite Mist. Lite Mist is sold in 1-liter bottles. Based on recent data, the CoolDay product has not been as profitable as LiteMist. Management is considering dropping the inexpensive CoolDay line so it can focus more attention on the LiteMist product. The LiteMist product already demands considerably more attention than the CoolDay line. Jack Eller, president and founder of Benton, is skeptical about this idea. He points out that for many decades the company produced only the CoolDay line and that it was always quite profitable. It wasn't until the company started producing the more complicated Lite Mist wine that the profitability of CoolDay declined. Prior to the introduction of Lite Mist, the company had basic equipment, simple growing and production procedures, and virtually no need for quality control. Because LiteMist is bottled in 1-liter bottles, it requires considerably more time and effort, both to bottle and to label and box than does CoolDay. The company must bottle and handle 5 times as many bottles of Lite Mist to sell the same quantity as CoolDay. CoolDay requires 1 month of aging; LiteMist requires 1 year. CoolDay requires cleaning and inspection of equipment every 10,000 liters; Lite Mist requires such maintenance every 600 liters. Jack has asked the accounting department to prepare an analysis of the cost per liter using the traditional costing approach and using activity-based costing. The following information was collected. Direct materials per liter Direct labor cost per liter Direct labor hours per liter Total direct labor hours CoolDay $0.40 $0.50 0.07 210,000 Lite Mist $1.20 $0.90 0.12 36,000 Estimated Use of Cost Drivers per Product 60 Activity Cost Pools Grape processing Aging Bottling and corking Labeling and boxing Maintain and inspect equipment Cost Drivers Cart of grapes Total months Number of bottles Number of bottles Number of inspections Estimated Overhead $147,167 759,000 309,600 208,800 242,400 $1,666,967 Estimated Use of Cost 6,600 6,600,000 900,000 900,000 800 CoolDay 6,000 3,000,000 600,000 600,000 350 LiteMist 600 3,600,000 300,000 300,000 450

Answer 1

Requirement 1: Manufacturing cost per litre using traditional product costing Products Manufacturing costs Cool day Lite Mist Direct materials 0.4 1.2 Direct labor 0.5 0.9 Overhead** 0.474 0.813 Total cost per litre 1.374 2.913 **Overhead cost per direct labor hour is $1,666,967 = (210,000 + 36,000) = $6.776 Therefore, Overhead cost of cool day = $6.776 x labor hours per litre = 6.776 x 0.07 = $0.474 Overhead cost of Lite mist = $6.776 x labor hours per litre = 6.776 x 0.12 = $0.813

Requirement 2: schedule showing calculation of activity based overhead rates Formula : Activity rate = Estimated overhead / expected use of cost drivers Estimated Activity pools overhead Grape processing 147,167 Aging 759,000 Bottiling and corking 309,600 labeling and boxing 208,800 Maintain and inspect equipment 242,400 Activity Expected based use of cost overhead drivers rates 6,600 22.298 6,600,000 0.115 900,000 0.344 900,000 0.232 800 3031

A C D E 144 145 146 147 148 List Mist Activity based Expected use overhead cost of cost drivers rate assigned 600 22.298 13,379 3,600,000 0.115 414,000 300,000 0.344 103,200 300,000 0.232 69,600 Requirement 3: Schedule of assigning cost based on ABC method Coolday Activity Expected based use of cost overhead cost Activity pools drivers rate assigned Grape processing 6,000 22.298) 133,788 Aging 3,000,000 0.115 345,000 Bottiling and corking 600,000 0.344 206,400 labeling and boxing 600,000 0.232 139,200 Maintain and inspect equipment 350 106,050 Total costs assigned 930,438 Litres produced 3,000,000 Overhead cost per litre 0.310 150 153 303) 450 154 303 136,350 736,529 300,000 2.455

Requirement 4: Cost per litre under ABC method Products Manufacturing costs Cool dayLite Mist Direct materials 0.41 1.2 Direct labor 0.9 Overhead**[refer reg 3] 0.310 2.455 Total cost per litre 1.210 4.555 0.51

Working:

B C D E H 145 146 Requirement 3: Schedule of assigning cost based o 147 List Mist 148 149 150 151 152 Activity pools Grape processing Aging Bottiling and corking labeling and boxing Coolday Activity based Expected use overhead of cost drivers rate cost assigned 6000 22.298 =+D149*E149 3000000 0.115 =+D150*E150 600000 10.344 =+D151*E151 600000 0.232 =+D152*E152 Expected use of cost drivers 600 3600000 300000 300000 Activity based overhead rate 22.298 0.115 0.344 0.232 cost assigned =+H149*1149 =+H150*1150 =+H151*1151 =+H152*1152 350 303 450 303 153 154 155 Maintain and inspect equipment Total costs assigned Litres produced Overhead cost per litre =+D153*E153 =+SUM(F149:F153) 3000000 =+F154/F155 =+H153*1153 =+SUM(J149:1153) 300000 =+J154/1155 156 157