Problem 4-4A a-d (Video) (Part Level Submission) CoolDay LiteMist Estimated Use
ID: 2338341 • Letter: P
Question
Problem 4-4A a-d (Video) (Part Level Submission)
CoolDay
LiteMist
Estimated Use of Cost
Drivers per Product
Activity Cost Pools
Cost Drivers
Estimated Overhead
Estimated Use of
Cost Drivers
CoolDay
LiteMist
$146,969
6,600
6,000
600
752,400
6,600,000
3,000,000
3,600,000
297,000
900,000
600,000
300,000
212,400
900,000
600,000
300,000
244,000
800
350
450
$1,652,769
(a)
CoolDay
LiteMist
Problem 4-4A a-d (Video) (Part Level Submission)
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 0.07 0.12 Total direct labor hours 210,000 36,000Estimated Use of Cost
Drivers per Product
Activity Cost Pools
Cost Drivers
Estimated Overhead
Estimated Use of
Cost Drivers
CoolDay
LiteMist
Grape processing Cart of grapes$146,969
6,600
6,000
600
Aging Total months752,400
6,600,000
3,000,000
3,600,000
Bottling and corking Number of bottles297,000
900,000
600,000
300,000
Labeling and boxing Number of bottles212,400
900,000
600,000
300,000
Maintain and inspect equipment Number of inspections244,000
800
350
450
$1,652,769
Answer each of the following questions.
Explanation / Answer
Predetermined overhead rate under teaditional system Estimated overhead/Total direct labor hour 6.7185732 Per labor hour (1652769/246000) CoolDay LiteMist Direct materials per liter $0.40 $1.20 Direct labor cost per liter $0.50 $0.90 Overhead assigned per litre 0.470 0.806 Manufacturing cost per liter $1.37 $2.91
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