1 answer

Benton Corporation produces two grades of non-alcoholic wine from grapes that it buys from California growers....

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

Answers


Benton Corporation Under traditional product costing using direct labor hours, compute the total manufacturing cost per liter

.

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