Bastille 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 Cool Day. It sells this in 600,000 5-liter jugs. Bastille also pro- duces and sells roughly 300,000 liters per year of a low-volume, high-cost product called Lite Mist. Lite Mist is sold in 1-liter bottles. Based on recent data, the Cool Day product has not been as profitable as Lite Mist. Management is considering dropping the inex- pensive Cool Day line so it can focus more attention on the Lite Mist product. The Lite Mist product already demands considerably more attention than the CoolDay line. Frank Summer, president and founder of Bastille, 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 Lite Mist wine that the profitability of CoolDay declined. Prior to the intro- duction of LiteMist, the company had simple equipment, simple growing and production procedures, and virtually no need for quality control. Because Lite Mist 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 bot- tles of LiteMist to sell the same quantity as Cool Day. Cool Day 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. Frank 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.

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 manufacturing cost per liter of both products.

(b) Under ABC, prepare a schedule showing the computation of the activity-based overhead 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 Frank Summer 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.

Transcribed Image Text:

CoolDay LiteMist Direct materials per liter $0.40 $1.20 Direct labor cost per liter $0.25 $0.50 Direct labor hours per liter 0.04 0.09 Total direct labor hours 120,000 27,000 Expected Use Expected of Cost Drivers Estimated Use of Cost per Product Activity Cost Pool Cost Driver Overhead Drivers CoolDay Lite Mist Grape processing Cart of grapes $ 145,200 6,600 6,000 600 Aging Total months 396,000 6,600,000 3,000,000 3,600,000 Bottling and Number of corking bottles 270,000 900,000 600,000 300,000 Labeling and Number of boxing bottles 189,000 900,000 600,000 300,000 Maintain and in- Number of spect equipment inspections 240,000 800 300 500 $1,240,200