Question

Problem 4. (24 marks) Niagara Winery produces small batch, unique wines. Grapes are purchased from local vineyards and then blended in creative ways. Except for the vintner (the person who actually makes the wine) process requires no direct labor, since it is entirely automated. One ton of grapes costs between S1,200 and $3,500 and makes 65 bottles of wine. Since each batch is different, the firm uses an ABC system. There are three cost pools: blending (vintner hours), ageing (number of barrels) and bottling (machine hours). Estimates at the beginning of the past season were Tons of grapes Cost of grapes Barrels produced Bottles produced Vintner hours Vintner salary Machine hours Cost of blending Cost of ageing Cost of bottling 530 S1,284,000 700 3,500 2,500 S80,000 87,000 S195,000 S245,000 S134,000 Romeo and Juliet ordered a batch of wine for their wedding. The batch required 2 tons of grapes costing S3,000 per ton. The vintner's time on the batch cost $10,000. She spent 300 hours on the project. 3 barrels of wine were put into storage to await the romantic day. When the time finally was near, 125 bottles of wine were produced, requiring 1,000 machine hours. a. What is the average cost of a bottle of wine from this winery? b. What is the cost of the wine for Romeo and Juliet? Specifically, why is the cost computed in (b) different from the cost computed in (a)? c. d. Do you agree that this firm needs an ABC system? Explain.

Answer 1

1. Average cost of bottle = (cost of grapes+vintner salary+cost of blending+cost of ageing+cost of bottling)/ total number of bottles

= (1244000+80000+195000+245000+134000)/3500

Average cost of bottle = $542.29 per bottle.

2. cost of bottle to romeo & juliet =   (cost of grapes+vintner salary+cost of blending+cost of ageing+cost of bottling)/ total number of bottles

= (6000+10000+1540+1050+23400)/125

= $335.92 per bottle

3. Cost computed in (2) above is deifferent because cost computed above is for the batch ordered by Romeo & Juliet and cost computed in (1) above is for total cost of Winery.

4. Yes. ABC analysis is good for costing of Winery.