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 LiteMist 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 $0.40 $0.50 0.06 180,000 Lite Mist $1.20 $0.90 0.07 21,000

Answer 1

(a). Traditional Product Costing: CoolDay 1.399 $ ListMist 2.682 Manufacturing cost per liter $ Workings: Direct Material Direct Labor *Overhead Manufacturing cost per liter $ $ $ $ CoolDay 0.400$ 0.500$ 0.499 $ 1.399 $ List Mist 1.200 0.900 0.582 2.682 *Predetermined OH Rate=$1,672,189/ 201,000 DLH= $ * CoolDay: $8.319 * 0.06 DLH= $ *ListMist: $8.319 * 0.07 DLH= $ 8.319 0.499 0.582 (b). Activity Cost Pools Grape Processing Aging Bottling and Corking Labeling and Boxing Maintain and Inspect equipment Expected Use of Estimated OH Cost Driver Activity Based OH Rate $ 146,989 6,600 $ 22.271 Per Cart $ 745,800 6,600,000 $ 0.113 Per Month $ 306,000 900,000 $ 0.340 Per Bottle $ 228,600 900,000 $ 0.254 Per Bottle $ 244,800 800$ 306.000 Per Inspection $ 1,672,189

© CoolDay Cost Activity Cost Pools Grape Processing Aging Bottling and Corking Labeling and Boxing Maintain and Inspect equipment Overhead Cost Assigned Liters Produced (given) Overhead Cost per liter Expected Use Activity Based Cost of Cost Driver OH Rate Assigned 6,000 $ 22.271 $ 133,626 3,000,000 $ 0.113 $ 339,000 600,000 $ 0.340$ 204,000 600,000 $ 0.254 $ 152,400 350 $ 306.000 $ 107,100 $ 936,126 3,000,000 $ 0.312 List Mist Activity Expected Use Based OH of Cost Driver Rate Assigned 600 $ 22.271 $ 13,363 3,600,000 $ 0.113 $ 406,800 300,000 $ 0.340 $ 102,000 300,000 $ 0.254 $ 76,200 450 $ 306.000 $ 137,700 $ 736,063 300,000 $ 2.454 (d). Activity Based Costing: CoolDay 1.212$ List Mist 4.554 Manufacturing cost per liter $ Workings: Direct Material Direct Labor *Overhead Manufacturing cost per liter $ $ $ $ CoolDay 0.400$ 0.500 $ 0.312$ 1.212 $ List Mist 1.200 0.900 2.454 4.554

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