Question

Question 5 Crane 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. Crane also produces and sells roughly 300,000 liters per year of a low-volume, high-cost product called LiteMist. 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 LiteMist product. The Lite Mist product already demands considerably more attention than the CoolDay line. Jack Eller, president and founder of Crane, 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; Lite Mist 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. 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 LiteMist $1.20 $0.90 0.10 30,000 Estimated Use of Cost Drivers per Product 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 $146,546 673,200 289,800 222,300 243,200 $1,575,046 Estimated Use of Cost Drivers 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 each of the following questions. 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 Lite Mist Manufacturing cost per liter

Answer 1

Total labor hours	240000
Overhead cost per hour	6.562691667
Calculation of manufacturing cost:
	CoolDay	LiteMist
Direct materials per liter	0.4	1.2
Direct labor cost per liter	0.5	0.9
Overhead Cost = Cost per hour*Labor hours per unit	0.45938842	0.65626917
Total Manufacturing Cost per litre	1.35938842	2.75626917
(b)Schedule showing computation of rates:
Overhead	Cost	Driver	Rate/Activity
Grape processing	146,546	6,600	22.204
Aging	673,200	6,600,000	0.102
Bottling and corking	289,800	900,000	0.322
Labeling and boxing	222,300	900,000	0.247
Maintain and inspect equipment	243,200	800	304
(c)Allocation of cost
Overhead	Rate/Activity	Activity- CoolDay	Cost Assigned	Activity-LiteMist	Cost Assigned
Grape processing	22.204	6,000	133,224	600	13,322
Aging	0.102	3,000,000	306,000	#######	367,200
Bottling and corking	0.322	600,000	193,200	300,000	96,600
Labeling and boxing	0.247	600,000	148,200	300,000	74,100
Maintain and inspect equipment	304	350	106,400	450	136,800
		Total	887,024		688,022
		Number of litres	3,000,000		300,000
		Cost per litre	0.29567467		2.29341
(d)Total Manufacturing cost:
	CoolDay	LiteMist
Direct materials per liter	0.4	1.2
Direct labor cost per liter	0.5	0.9
Overhead Cost	0.29567467	2.293408
Total Manufacturing Cost per litre	1.196	4.393
e.ABC uses different overhead allocation rates which better represent the true pattern of consumption of resources and hence is a better method of cost allocation. It represents the actual cost incurred on products and should be used to evaluate profitability and for analysis. Traditional costing so not represent true consumption of resources and rather uses a single rate for allocation and thereby distorts cost information leading to poor decisions