Reference no: EM131255186

Benton Corporation produces two grades of non-alcoholic wine from grapes that it buys from California growers. It produces and sells roughly 13,008,000 liters per year of a low-cost, high-volume product called CoolDay. It sells this in 2,601,600 5-liter jugs. Benton also produces and sells roughly 1,300,800 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 $1.73 $5.20 Direct labor cost per liter $2.17 $3.90 Direct labor hours per liter $0.22 $0.39 Total direct labor hours 2,820,134 507,624 Estimated Overhead Estimated Overhead Activity cost pools Grape processing Cart of grapes $632,449 Aging Total months 1,717,056 Bottling and corking Number of bottles 1,170,720 Labeling and boxing Number of bottles 819,504 Maintain & inspect equipment Number of inspections 1,044,109 $5,383,838 Instructions Answer each of the following questions. (Round all calculations to two decimal places.) a. Under traditional product costing using direct labor hours, compute the total manufacturing cost per liter of both products. OH rate: Cost per liter -- Traditional costing CoolDay LiteMist DM DL OH Total b. Under ABC, prepare a schedule showing the computation of activity-based overhead rates (per cost driver). Activity cost pool OH rate Grape processing per cart Aging per month Bottling and corking per bottle Labeling and boxing per bottle Maintain & inspect equipment per inspection 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. Total OH allocation CoolDay LiteMist Grape processing Aging Bottling and corking Labeling and boxing Maintain & inspect equipment Total CoolDay LiteMist OH cost per liter: d. Compute the total manufacturing cost per liter for both products under ABC. Cost per liter -- ABC costing CoolDay LiteMist DM DL OH Total e. Which costing approach should Jack Eller follow? Why?