Problem 18-4A Benton Corporation produces two grades of non-alcoholic wine from
ID: 2336225 • Letter: P
Question
Problem 18-4A 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. Direct materials per liter Direct labor cost per liter Direct labor hours per liter Total direct labor hours CoolDay LiteMist $1.20 $0.90 0.12 36,000 $0.40 $0.50 0.07 210,000 Expected Use of Cost Drivers per Product Expected Use of 6,600 900,000 Activity Cost Pools Cost Drivers Estimated Overhead Cost Drivers Coolbay LiteMist Grape processing Aging Bottling and corking Labeling and boxing Maintain and inspect equipment Cart of grapes Total months Number of bottles Number of bottles Number of inspections $147,167 759,000 309,600 208,800 242,400 $1,666,967 600 6,600,000 3,000,000 3,600,000 300,000 300,000 450 6,000 600,000 600,000 350 900,000 Answer each of the following questions.Explanation / Answer
Answer:
1
Under traditional product costing using direct labor hours, compute the total manufacturing cost per liter of both prodcuts
First we find the overhead allocation rate
Total Overhead
$1,666,967
Total Direct labor Hours
246,000
overhead allocation rate as per traditional costing
= Total Overhead / Total Direct labor Hours
=1,666,967 /246,000
=6.776
Calculation of Total Manufacturing Cost as per traditional costing
Manufacturing Cost
CoolDay
LiteMist
Direct Material
$0.400
$1.200
Direct Labor
$0.500
$0.900
Overhead (6.776*0.7) (6.776*0.12)
$0.474
$0.813
Total
$1.374
$2.913
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2
Under ABC (Activity-Based-Costing) prepare a schedule showing the computation of the activity-based overhead rates (per cost driver)
Activity Cost Pools
Cost Drivers
Estimated Overhead
Expected use of Cost Drivers
Activity Based Overhead rate
Grape processing
Cart of Grapes
$145,860
6,600
$22.10
Aging
Total months
396,000
6,600,000
$0.06
Bottling and corking
Number of bottles
270,000
900,000
$0.30
Labeling and boxing
Number of bottles
189,000
900,000
$0.21
Maintain and inspect equipment
Number of inspections
240,800
800
$301
$1,241,660
Note:
The total cost in a cost pool is divided by the usage to get the per unit cost
3
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.
CoolDay
LiteMist
Activity Cost Pools
Use of Cost Driver
Rate
Cost Assigned
Use of Cost Driver
Rate
Cost Assigned
Grape processing
6,000
$22.10
$132,600.00
600
$22.10
13,260
Aging
3,000,000
$0.06
$180,000.00
3,600,000
$0.06
216,000
Bottling and corking
600,000
$0.30
$180,000.00
300,000
$0.30
90,000
Labeling and boxing
600,000
$0.21
$126,000.00
300,000
$0.21
63,000
Maintain and inspect equipment
350
$301.00
$105,350.00
450
$301.00
135,450
Total Costs
$723,950.00
$517,710
Liters Produced
3,000,000
300,000
Overhead Cost per Liter
$0.241
$1.726
4
Compute the total manufacturing cost per liter for both products under ABC
Calculation of Total Manufacturing Cost
Manufacturing Cost
CoolDay
LiteMist
Direct Material
0.4
1.2
Direct Labor
0.25
0.5
Overhead
$0.241
$1.726
Total
0.891
3.426
Total Overhead
$1,666,967
Total Direct labor Hours
246,000