P4-4A Benton Corporation produces two grades of 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 pro- duces 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 compli- cated LiteMist wine that the profitability of CoolDay declined. Prior to the introduction of LiteMist, the company had simple 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.

 

 

 

Â	CoolDay	Â	LiteMist
Direct materials per liter	$0.40	Â	$1.20
Direct labor cost per liter	$0.50	Â	$0.90
Direct labor hours per liter	0.05	Â	0.09
Total direct labor hours	150,000	Â	27,000

 

 

 

Expected                        Expected Use

 

Use of            of Cost Drivers Estimated     Cost                               Per Product  

 

 

 

Activity Cost Pools	Cost Drivers	Â	Overhead	Â	Drivers	Â	CoolDay	Â	LiteMist
Grape processing	Cart of grapes	Â	$   145,860	Â	6,600	Â	6,000	Â	600
Aging	Total months	Â	396,000	Â	6,600,000	Â	3,000,000	Â	3,600,000
Bottling and	Number of	Â	Â	Â	Â	Â	Â	Â	Â
corking	bottles	Â	270,000	Â	900,000	Â	600,000	Â	300,000
Labeling and	Number of	Â	Â	Â	Â	Â	Â	Â	Â
boxing	bottles	Â	189,000	Â	900,000	Â	600,000	Â	300,000
Maintain and	Number of	Â	Â	Â	Â	Â	Â	Â	Â
inspect equipment	inspections	Â	240,800	Â	800	Â	350	Â	450
Â	Â	Â	$1,241,660	Â	Â	Â	Â	Â	Â

 

 

 

 

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Instructions

 

Answer each of the following questions. (Round all calculations to three decimal  places.)

 

(a)   Under traditional product costing using direct labor hours, compute the total manu- facturing cost per liter of both products.

 

 

 

(b)  Under ABC, prepare a schedule showing the computation of the activity-based over- head rates (per cost driver).

 

(c)   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.

 

(d)  Compute the total manufacturing cost per liter for both products under ABC.

 

(e)   Write a memo to Jack Eller discussing the implications of your analysis for the company’s plans. In this memo, provide a brief description of ABC as well as an explanation of how the traditional approach can result in distortions.