BACKGROUND Myka Freven was recently hired as manager of A Votre Sante, a small independent Napa-Green-certied winery located in the Napa Valley, California, American Viticultural Area (AVA) that is owned by her father, Jack Freven.2 A Votre Sant (AVS), which means \"to your health\" in French, has a reputation for producing quality chardonnay wine. In 2005, Jack expanded the family's grape-growing operations and founded AVS as a means to involve his daughter in the wine business. Myka is a recent MBA graduate from the Haas School of Business at the University of California, Berkeley, and intends to take over the management of AVS in due time. Being Napa-Green certied, the region's land use and environmental certication program, AVS is diligent about assessing cellar operations, implementing practices to conserve resources, improving comprehensive water and energy use, and conducting audits along with a waste diversion assessment AVS buys chardonnay grapes from the family's grape- growing operations and processes the grapes into a chardonnay- estate wine. Local restaurants purchase AVS wine to serve to their customers. During her rst few weeks as manager, Myka met with the managers and learned that the average demand and sales for the chardonnay estate was steady at 39,600 bottles of wine, and the average price was US$9.00 per bottle. The company, however, is experiencing declining net prots. Therefore, she decided to revisit the company's costing and pricing policy. She also shared with the managers her goal of maintaining a gross prot of 50% to cover AVS administrative expenses, which is consistent with operations of wineries. Myka met with the managers of the two production departments, the Crushing and Fermenting department and the Bottling department. From her meetings, she gathered that the company is using the weighted average method of preparing production reports under a process costing system. The managers in both departments consider all spoilage to be normal, and so, they ignore the costs of normal spoilage. This means no costs are added to goods that are spoiled, and spoilage is not reported because the cost of normal spoilage is included in the cost of good units completed. Furthermore, the managers noted that they have worked hard to maintain the appropriate control measures and reduce their abnormal spoilage to 0% in the last ve years. So, they inspect goods only at the end of the process in each department. WINEMAKING PROCESS Harvest takes place in the late summer and early fall months; typically, the time elapsed from harvest to nal sale is about 11 months. The chardonnay grapes are purchased from AVS Vineyards at US$1.34 per pound, instead of purchasing from an outside vineyard. An important quality of Chardonnay wine is dependent upon the acidity of the grapes. So the grapes are picked from AVS Vineyards two weeks earlier than other producers. AVS Vineyard sells to other wineries in the market at US$1.34 per pound, and transfers to the AVS winery at the same market price of US$1.34 per pound.3 On average a purchase of 40 pounds of grapes are required to produce one case (12 bottles) of wine. In August 2017, AVS purchased 382,836 pounds of grapes from AVS vineyards at US$1.34 per pound. The following are the major processes and departments in the Winery: CRUSHING AND FERMENTING Bottling: Approximately 200 pounds of crushed grapes are Crushing: The grapes are transferred to the winery for washing filled in a barrel of wine. Each barrel transferred to the bottling and crushing after harvest. The crushing process separates department can yield 11 cases or 132 bottles of wine. Bottling the juice from the pulp, skin, and stems. The juice is used is a very important process, and AVS takes every precautionary to make the wine; the pulp, skin, and stems are recycled as measure, such as proper sanitation, cleaning, bottle washing, compost onto the fields whenever possible or disposed of controlling sulfur dioxide depletion, and inspecting in order according to the Napa Green certified land program. to prevent contamination and inefficient operations. Spoilage Fermenting: The extracted juice is initiated into the is 10%, and the accountant and managers have determined fermenting process. An important factor in the final taste of that all spoilage is considered normal and is detected at the chardonnay is whether the juice is aged in oak. Chardonnay end of the production process. They insist that spoilage is fermented using oak barrels, which gives flavor to the final in the Bottling department is related to the technology of product. White wines have a shorter timeline for aging, and the machines used in the facility. Since AVS does not have they are barrel-aged because they are meant to be consumed state-of-the-art technology, there is some spoilage related to within five years. All fermenting takes place in a temperature- bottle cracking or breaking during the filling process. The controlled environment; however, each fermenting method managers believe that this spoilage is unavoidable. They are results in some wine loss through evaporation. The expected considering making an investment in two years to update the loss in volume through fermentation is 10% and is considered technology in the Bottling department. Tables 1 and 2 show to be normal spoilage.* At the end of this process, each barrel the information for August 2017. of wine is one unit. The department manager classifies all spoilage as normal, related to loss from fermentation.Table 1: Data for the Crushing and Fermenting Department lor August 2011 Physical units (barrels) Direct materials Conversion costs Work in process, August 1 200 Degree of completion of beginning work in process Started during August 2017 1,500 $63,400 100% $50,120 70% Completed during August 2017 1,200 Work in process, August31 500 Degree of completion of ending work in process Total costs added during August 2017 Note: All monetaryvalues are in US dollars. Table 2: Data for the Bottling Department for August 2017 Physical units (barrels) Work in process, August 1 250 Degree of completion of beginning work in process Transferred-in during August 2017 100% $513,000 Transferred-in $100,000 100% 80% $438,000 Conversion costs $7,105 70% Completed during August 2017 Work in process, August31 Degree of completion of ending work in process Total costs added during August 2017 More: All monetaryvalues are in US dollars. 0% $1 8.400 30% $14,025 Production Report Analysis: Prepare production reports under the weighted average as well as the FIFO method. What is the cost per bottle under each method? What is considered as normal and abnormal spoilage, respectively in the wine making process? How are the costs associated with normal and abnormal spoilage treated? Is it appropriate to ignore the cost of normal spoilage because all spoilage is normal? Decision Analysis: Myka would like to maintain a 50% gross prot to cover AVS's administrative expenses of US$125,000 and target a 15% net prot. What should the target cost per case be in order to achieve these goals? Does the current production report in AVS help achieve these targets? Does your nal production report show costs per case that will lead to achieving these targets? Ethical Implications: What are the possible reasons for managers to state that all spoilage is normal? What additional information would you request from managers to conrm that there is no abnormal spoilage and that all spoilage is normal