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		0.12
Total direct labor hours		150,000		36,000

								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		$146,593		6,600		6,000		600
Aging		Total months		541,200		6,600,000		3,000,000		3,600,000
Bottling and corking		Number of bottles		297,000		900,000		600,000		300,000
Labeling and boxing		Number of bottles		206,100		900,000		600,000		300,000
Maintain and inspect equipment		Number of inspections		244,000		800		350		450
				$1,434,893

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		LiteMist
Manufacturing cost per liter		$		$

eTextbook and Media

  

  

Under ABC, prepare a schedule showing the computation of the activity-based overhead rates (per cost driver). (Round overhead rates to 3 decimal places, e.g. 12.250.)

Activity Cost Pools		Estimated Overhead		Estimated Use of Cost Drivers		Activity-Based Overhead Rates
Grape processing		$				$	per cart
Aging						$	per month
Bottling and corking						$	per bottle
Labeling and boxing						$	per bottle
Maintain and inspect equipment						$	per inspection
		$

eTextbook and Media

  

  

Prepare a schedule assigning each activity’s overhead cost pool to each product, based on the use of cost drivers. Include a computation of overhead cost per liter. (Round overhead rate, cost per liter to 3 decimal places, e.g. 12.250 and cost assigned to 0 decimal places, e.g. 12,250.)

CoolDay

ListMist

Activity Cost Pool

Estimated Use of Cost Drivers

Activity-Based Overhead Rates

Cost Assigned

Estimated Use of Cost Drivers

Activity-Based Overhead Rates

Cost Assigned

Grape processing

$

$

$

$

Aging

$

$

Bottling and corking

$

$

Labeling and boxing

$

$

Maintain and inspect equipment

$

$

Overhead costs assigned

$

$

Liters produced

Overhead cost per liter

$

$

eTextbook and Media

  

  

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

Answer 1

Benton Corporation 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 $1.286 $3.026 7.714478495 0.385723925 0.4 0.5 Predetermined Overhead per direct labor hour = 1434893 / (150000 + 36000 ) = $7.71 CoolDay = 0.40 +0.50 + ( 7.71 x 0.05 ) = $1.286 Lite Mist = $1.20 + $0.90 + ( 7.71 x 0.12) = $3.026 1.285723925 Under ABC, prepare a schedule showing the computation of the activity-based overhead rates . (Round overhead rates to 3 decimal places, e.g. 12.250.) Activity Cost Pools Estimated Overhead Expected Use of Cost Drivers Activity-Based Overhead Rates Grape processing $1,46,593 6,600 $22.211 per cart Aging 5,41,200 66,00,000 $0.082 per month Bottling and corking 2,97,000 9,00,000 $0.330 per bottle Labeling and boxing 2,06,100 9,00,000 $0.229 per bottle Maintain and inspect equipm 2,44,000 800 $305.000 per inspecti $14,34,893 Prepare a schedule assigning each activity's overhead cost pool to each product, based on the use of cost drivers. Include a computation of overhead cost per liter. (Round overhead rate, cost per liter to 3 decimal places, e.g. 12.250 and cost assigned to 0 decimal places, e.g. 12,250.) CoolDay Activity-Based Overhead Rates Expected Use of Cost Drivers List Mist Expected U Activity-Based Cost DriverOverhead Rates Activity Cost Pool Cost Assigned Cost Assigned Grape processing 6,000 $22.211 $1,33,266 600 $22.211 $13,327 Aging 30,00,000 $0.082 $2,46,000 36,00,000 $0.082 $2,95,200 Bottling and corking 6,00,000 $0.330 $1,98,000 3,00,000 $0.330 $99,000 Labeling and boxing 6,00,000 $0.229 $1,37,400 3,00,000 $0.229 $68,700 Maintain and inspect equipm 350 $305.000 $1,06,750 450 $305.000 $1,37,250 Total costs assigned $8,21,416 $6,13,477 Liters produced $30,00,000 $3,00,000 Overhead cost per liter 0.274 2.045 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 Lite Mist Manufacturing cost per liter $1.174 $4.145 CoolDay = 0.40 +0.50 +0.274 = $1.174 Lite Mist = $1.20 + $0.90 +2.045 = $4.145