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 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 0.07 Total direct labor hours 150,000 21,000 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 $146,751 6,600 6,000 600 Aging Total months 699,600 6,600,000 3,000,000 3,600,000 Bottling and corking Number of bottles 296,100 900,000 600,000 300,000 Labeling and boxing Number of bottles 243,000 900,000 600,000 300,000 Maintain and inspect equipment Number of inspections 244,000 800 350 450 $1,629,451 Answer each of the following questions.

Your answer is incorrect. Try again. Compute the total manufacturing cost per liter for both products under ABC. (Round overhead cost per liter to 3 decimal places, e.g. 1.225.) CoolDay LiteMist Manufacturing cost per liter $ $

Your answer is incorrect. Try again. Under traditional product costing using direct labor hours, compute the total manufacturing cost per liter of both products. (Round answers to 3 decimal places, e.g. 12.250.) CoolDay LiteMist Manufacturing cost per liter $ $

Answer 1

Part 1
	Computation of ABC rate
	Activity	OH Costs(Col 1)	No. of activity base(Col 2)	Activity Rate(Col 1 / Col 2)
	Grape Processing	$                                      1,46,751	6,600	$                             22.24	per cart
	Aging	$                                      6,99,600	66,00,000	$                               0.11	per month
	Bottling and Corking	$                                      2,96,100	9,00,000	$                               0.33	per bottle
	Labelling and Boxing	$                                      2,43,000	9,00,000	$                               0.27	per bottle
	Maintain and inspect equipment	$                                      2,44,000	800	$                           305.00	per inspection
	Allocation of Overhead Costs
		CoolDay		LiteMist
		Activity Based usage	Activity Based usage*ABC rate	Activity Based usage	Activity Based usage*ABC rate
	Grape Processing	6000	$                          1,33,410.00	600	$                           13,341.00
	Aging	3000000	$                          3,18,000.00	3600000	$                        3,81,600.00
	Bottling and Corking	600000	$                          1,97,400.00	300000	$                           98,700.00
	Labelling and Boxing	600000	$                          1,62,000.00	300000	$                           81,000.00
	Maintain and inspect equipment	350	$                          1,06,750.00	450	$                        1,37,250.00
	Total Overhead Cost allocated		$                          9,17,560.00		$                        7,11,891.00
	Production(in ltrs)		3000000		300000
	Overhead Cost per litre		$                                    0.306		$                                  2.373
	Calcuation of Manufacturing cost per litre
		CoolDay	LiteMist
	Direct Materials per litre	$                                           0.400	$                                    1.200
	Direct labor cost per litre	$                                           0.500	$                                    0.900
	Overhead Cost per litre	$                                           0.306	$                                    2.373
	Manufacturing cost per litre	$                                           1.206	$                                    4.473
Part 2
	Overhead rate per labor hour =$1,629,451 / 171,000 hours =$9.529 per hour
		CoolDay	LiteMist
	Total Direct labor hours	150000	21000
	Overhead rate per labor hour	$                                           9.259	$                                    9.259
	Total Overhead Costs	$                                    13,88,850	$                               1,94,439
	Production(in ltrs)	3000000	300000
	Overhead Cost per litre	$                                           0.463	$                                    0.648
	Calcuation of Manufacturing cost per litre
		CoolDay	LiteMist
	Direct Materials per litre	$                                           0.400	$                                    1.200
	Direct labor cost per litre	$                                           0.500	$                                    0.900
	Overhead Cost per litre	$                                           0.463	$                                    0.648
	Manufacturing cost per litre	$                                           1.363	$                                    2.748