Question

Problem 4-4A a-d (Video) (Part Level Submission) 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. 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 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 Lite Mist 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 Lite Mist 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; 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. CoolDay $0.40 $0.50 0.04 Lite Mist $1.20 $0.90 Direct materials per liter Direct labor cost per liter Direct labor hours per liter Total direct labor hours 0.07 120,000 21,000

Answer 1

Please refer the following image for the solution:  

Schedule showing computation of Activity based overhead rates (per cost driver) Estimated Estimate Use of Activity Based Activity Cost Pools Overhead Cost Drivers Overhead Rates Grape Processing $ 147,022 6,600 $ 22.276 per cart Aging $ 699,600 6,600,000 $ 0.106 per month Bottling and corking $ 280,800 900,000 $ 0.312 per bottle Labeling and boxing $ 214,200 900,000 $ 0.238 per bottle Maintain and inspect equipment $ 244,800 800$ 306.000 per inspection $ 1,586,422 Activity Rate Estimated Overhead / Estimated use of cost drivers