Benton Corporation produces two grades of non-alcoholic wine from grapes that it

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.

Explanation / Answer

1. cost per liter using the traditional costing approach:

Overhead cost per unit = estimated overhead cost / Total direct labour hours

= 1,575,046 / 210,000 + 30,000 = 1,575,046 / 240,000 = 6.56 per hour
for cool day overhead cost = 6.56 * 0.07 =$0.459 and for Litemist its = 6.56*0.01 = $0.0656

2.preparing an analysis of the cost per liter using activity-based costing:

first we need to compute Activity based over-head rate,

Preparing a Schedule for assigning each overhead activity cost pool to each product based on the cost drivers:

Computation of Total manufacturing cost per liter

Details Cool day List mist direct material cost per liter 0.4 1.2 Direct labour cast per liter 0.5 0.9 Overhead cost ( as the above calculation) 0.459 0.0656 Manufacturing cost per liter 1.359 2.166

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