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 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 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 Lite Mist 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; Lite 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 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 Lite Mist $0.40 $1.20 $0.50 $0.90 0.07 0.08 210,000 24.000 Activity Cost Pools Cost Drivers Grape processing Cart of grapes Aging Total months Bottling and corking Number of bottles Labeling and boxing Number of bottles Maintain and inspect equipment Number of inspections Estimated Overhead $146,678 673.200 286,200 233,100 242,400 $1,581,578 Estimated Use of Cost Drivers per Product Estimated Use of Cost Drivers CoolDay Lite Mist 6,600 6.000 600 6,600,000 3,000,000 3,600,000 900,000 600,000 300,000 900,000 600,000 300,000 800 350 450 Answer each of the following questions.

Answer 1

Answer is given below

Direct labor hour rate Total Overheads Direct Labor hours $1,581,578 234,000 $6.759 Per Direct Labor hour Working note: Total Direct labor hours Labor hour per unit Output litres Total labor hours CoolDay 0.07 3,000,000 210,000 Lite Mist 0.08 300,000 24,000 234,000 Overhead allocated Overhead per unit $1,419,365 $0.473 $162,213 B $0.541 B/A a) Manufacturing cost - As per traditional method | CoolDayLite Mist Direct Material per litre $0.400 $1.200 Direct Labor per litre $0.500 $0.900 Overhead per litre $0.473 $0.541 Manufacturing cost per litre $1.373 $2.641 Activity Cost pool Grape processing Aging Bottling and corking Labelling and boxing Maintain and inspect equipment Total Overheads Cost Pool $146,678 $673,200 $286,200 $233,100 $242,400 $1,581,578 Total Activities 6,600 6,600,000 900,000 900,000 800 Activity Rate $22.224 per cart $0.102 per month $0.318 per bottle $0.259 per bottle $303.000 per inspection Expected use of cost drivers Cost Assigned Cost Assigned CoolDay Activity- Based Overhead rates $22.224 $0.102 $0.318 $0.259 $303.000 Lite Mist Expected Activity- use Based of cost Overhea drivers d rates 600 $22.224 3,600,000 $0.102 300,000 $0.318 300,000 $0.259 450 $303.000 Grape processing Aging Bottling and corking Labelling and boxing Maintain and inspect equipment Total Cost assigned Total output Manufacturing cost per unit 6,000 3,000,000 600,000 600,000 350 $133,344 $306,000 $190,800 $155,400 $106,050 $891,594 3,000,000 $0.2971 $13,334 $367,200 $95,400 $77,700 $136,350 $689,984 300,000 $2.300 c) Manufacturing cost - As per ABC method CoolDayLite Mist Direct Material per litre $0.400 $1.200 Direct Labor per litre $0.500 $0.900 Overhead per litre $0.297 $2.300 Manufacturing cost per litre $1.197 $4.400