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.

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		0.09
Total direct labor hours		150,000		27,000

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

Answer each of the following questions.

Explanation
Computation of unit costs—traditional costing

Overhead cost per direct labor hour is $1,241,660 ÷ (150,000 + 27,000) = $7.015

		Products
Manufacturing Costs		CoolDay			LiteMist
Direct materials		$0.400			$1.200
Direct labor		0.500			0.900
Overhead		0.351	*		0.631	**
		$1.251			$2.731

*$7.015 x 0.05 = 0.351
**$7.015 x 0.09 = 0.631

Under ABC, prepare a schedule showing the computation of the activity-based overhead rates. 



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.




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

Products

Manufacturing Costs

CoolDay

LiteMist

Direct materials

$0.400

$1.200

Direct labor

0.500

0.900

Overhead

0.241

1.726

$1.141

$3.826

Thanks