Question

Waterway 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, Waterway 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 Lite Mist Management is considering dropping the inexpensive CoolDay line so it can focus more attention on the Lite Mist product. The Lite Mist product already demands considerably more attention than the CoolDay line. Jack Eller, president and founder of Waterway, 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 UteMist, 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 Ute Mist to sell the same quantity as CoolDay, CoolDay requires 1 month of aging: Ute Mist 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 efter sing 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 CoolDayLite Mist $0.40 $1.20 $0.50 $0.90 0.09 150,000 27.000 0.05 Estimated Use of Cost Drivers per Product LiteMist Activity Cost Pools Grape processing Aging Bottling and coriding 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 $147,127 693,000 311.400 207,000 243,200 $1.601.727 Estimated Use of Cost Drivers 6.600 6,600,000 900.000 900,000 CoolDay 6.000 3.000.000 600,000 600,000 350 3,600,000 300,000 300,000 Answer each of the following questions.

Answer 1

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and calculation. For detailed answer refer to the supporting sheet.

Answer 2 Part 1) Overhead rate per direct labour hour = total overheads / direct labour hour = 1601727 / (150000+27000) = 9.049305 5 1.2 Manufacturing Cost Per Liter CoolDay Lite Mist o Direct Material 0.4 1 DirectLabour 0.5 2 Manufacturing overheads 0.452 3 Total 1.3525 0.9 0.814 2.9144 5 Part 2) Activity Based Overhead Rates 6 Activity Cost Pools 7 Grape Processing 8 Aging 9 Bottling and corking 0 Labelling and boxing 1 Maintain and inspect equipment Estimated Estimated use of Overheads cost drivers 147127 6600 693000 6600000 311400 900000 207000 900000 243200 800 1601727 22.292 Per cart 0.105 Per month 0.346 Per bottle 0.230 Per bottle 304 Per inspection

Cost assigned 24 Part 3) Cool Day Estimated use of Activity Based 26 Activity Cost Pools cost drivers Overhead Rates 27 Grape Processing 6000 22.292 28 Aging 3000000 0.105 29 Bottling and corking 600000 0.346 30 Labelling and boxing 600000 0.230 31 Maintain and inspect equipment 350 304.000 32 Overhead cost assigned 33 Units produced Estimated use of Cost assigned cost drivers 133752 600 315000 3600000 207600 300000 138000 300000 106400 450 900752 3000000 Lite Mist Activity Based Overhead Rates 22.292 0.105 0.346 0.230 304.000 13375 378000 103800 69000 136800 700975 300000 34 35 Overhead cost per litre 0.300 2.337 Manufacturing Cost Per Liter CoolDay L ite Mist 39 Direct Material 0.4 1.2 40 DirectLabour 0.9 41 Manufacturing overheads 0.300 2.337 42 Total 1.200 4.437 10.5 14 Thus the final answer CoolDay 1.200 y Lite Mist 4.437 46 Manufacturing cost per litre