Question

Problem 4-4A a-d (Video) 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 LiteMist. LiteMist 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 LiteMist wine that the profitability of CoolDay declined. Prior to the introduction of LiteMist, 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 LiteMist 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; LiteMist 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. CoolDay LiteMist Direct materials per liter $0.40 $1.20 Direct labor cost per liter $0.50 $0.90 Direct labor hours per liter 0.05 0.09 Total direct labor hours 150,000 27,000 Estimated Use of Cost Drivers per Product Activity Cost Pools Cost Drivers Estimated Overhead Estimated Use of Cost Drivers CoolDay LiteMist Grape processing Cart of grapes $145,860 6,600 6,000 600 Aging Total months 396,000 6,600,000 3,000,000 3,600,000 Bottling and corking Number of bottles 270,000 900,000 600,000 300,000 Labeling and boxing Number of bottles 189,000 900,000 600,000 300,000 Maintain and inspect equipment Number of inspections 240,800 800 350 450 $1,241,660

Your answer is incorrect. Try again. Prepare a schedule assigning each activity’s overhead cost pool to each product, based on the use of cost drivers. Include a computation of overhead cost per liter. (Round overhead rate, cost per liter to 3 decimal places, e.g. 12.250 and cost assigned to 0 decimal places, e.g. 12,250.) CoolDay ListMist Activity Cost Pool Estimated Use of Cost Drivers Activity-Based Overhead Rates Cost Assigned Estimated Use of Cost Drivers Activity-Based Overhead Rates Cost Assigned Grape processing $ $ $ $ Aging $ $ Bottling and corking $ $ Labeling and boxing $ $ Maintain and inspect equipment $ $ Overhead costs assigned $ $ Liters produced Overhead cost per liter $ $

Answer 1

	CoolDay			LiteMist
Activity Cost Pool	Estimated Use of Cost Drivers	Activity-Based Overhead Rates	Cost Assigned	Estimated Use of Cost Drivers	Activity-Based Overhead Rates	Cost Assigned
Grape processing	6000	22.100	132600	600	22.100	13260
Aging	3000000	0.060	180000	3600000	0.060	216000
Bottling and corking	600000	0.300	180000	300000	0.300	90000
Labeling and boxing	600000	0.210	126000	300000	0.210	63000
Maintain and inspect equipment	350	301.000	105350	450	301.000	135450
Overhead costs assigned			723950			517710
Liters produced			3000000			300000
Overhead cost per liter			0.241			1.726

Working:

Activity Cost Pool	Estimated Overhead	Estimated Use of Cost Drivers	Activity-Based Overhead Rates
Grape processing	145860	6600	22.100
Aging	396000	6600000	0.060
Bottling and corking	270000	900000	0.300
Labeling and boxing	189000	900000	0.210
Maintain and inspect equipment	240800	800	301.000