Instructions

This assignment requires to discuss pros and cons of different alternatives proposed to determine the cost of products. Although computations are needed, emphasis should be made on the analysis of advantages and disadvantages associated to the election of one costing system over another.

The assignment should be completed in a .doc file, with less than 1,500 words

Red California Wineries Red California Wineries is one of the main wineries in California. The winery produces five different brands. Although the company used to have a very strong position in the West coast, in recent years competition has been increasing. As a result, the company wants to determine the possible cost differences between the various brands in order to take on competition in a systematic way. The total estimated production of wine is 50 million liters per year, nevertheless there are considerable differences between the five brands. The main product, Northern wine, represents 60 percent of the total volume, while Southern wine, one of the smaller brands, contributes only 10 percent of the total volume. The winery has estimated costs (in thousands of $) as shown in Table 1. Roughly 25 percent of the indirect costs are variable in the short run. Table I. Red California Wineries' estimated cost (Thousands of $) Northern wine Other brands Southern wine Total Direct materials 60,000 31,000 9,000 100,000 Direct labor 15,000 7,000 3,000 25,000 Indirect costs 100,000 Total costs 225,000 To describe the cost situation, Red California Wineries decides to develop the following cost analyses: a) Variable costing; b) Full (or absorption) costing; and c) Activity-based costing (ABC). Additional information available is as follows. Indirect costs have been attributed to activities as shown in Table II. Table II. Indirect costs of activities Activity Costs (in $) Cost driver Materials handling 9,000,000 Buying orders Production set-ups 13,000,000 Set-ups Bottling 40,000,000 Machine time Quality control 12,000,000 Inspection time Marketing 6,000,000 No of brands Administration 20,000,000 Total indirect costs 100,000000 Capacity Per transaction (in $) 750 12,000 1,000 13,000 40,000 1,000 8,000 1,500 10 600,000 According to the present estimates, brands will require activities according to Table III. 1 Table III. Activities vs brands Activity Northern wine Other brands Southern wine Buying orders 250 300 150 Set-ups 400 350 200 Bottling time (hours) 24,000 8,000 4,000 Inspection time (hours) 4,000 2,000 2,000 The selling price, excluding taxes, for Northern wine is $4.20 per liter, and for Southern wine is $4.50 per liter. The other brands are priced between those two levels. Red California Wineries' wants to know your approach regarding the production costs and profitability per liter of Northern wine and Southern wine under each of the three costing systems. Present your proposal. Red California Wineries Red California Wineries is one of the main wineries in California. The winery produces five different brands. Although the company used to have a very strong position in the West coast, in recent years competition has been increasing. As a result, the company wants to determine the possible cost differences between the various brands in order to take on competition in a systematic way. The total estimated production of wine is 50 million liters per year, nevertheless there are considerable differences between the five brands. The main product, Northern wine, represents 60 percent of the total volume, while Southern wine, one of the smaller brands, contributes only 10 percent of the total volume. The winery has estimated costs (in thousands of $) as shown in Table 1. Roughly 25 percent of the indirect costs are variable in the short run. Table I. Red California Wineries' estimated cost (Thousands of $) Northern wine Other brands Southern wine Total Direct materials 60,000 31,000 9,000 100,000 Direct labor 15,000 7,000 3,000 25,000 Indirect costs 100,000 Total costs 225,000 To describe the cost situation, Red California Wineries decides to develop the following cost analyses: a) Variable costing; b) Full (or absorption) costing; and c) Activity-based costing (ABC). Additional information available is as follows. Indirect costs have been attributed to activities as shown in Table II. Table II. Indirect costs of activities Activity Costs (in $) Cost driver Materials handling 9,000,000 Buying orders Production set-ups 13,000,000 Set-ups Bottling 40,000,000 Machine time Quality control 12,000,000 Inspection time Marketing 6,000,000 No of brands Administration 20,000,000 Total indirect costs 100,000000 Capacity Per transaction (in $) 750 12,000 1,000 13,000 40,000 1,000 8,000 1,500 10 600,000 According to the present estimates, brands will require activities according to Table III. 1 Table III. Activities vs brands Activity Northern wine Other brands Southern wine Buying orders 250 300 150 Set-ups 400 350 200 Bottling time (hours) 24,000 8,000 4,000 Inspection time (hours) 4,000 2,000 2,000 The selling price, excluding taxes, for Northern wine is $4.20 per liter, and for Southern wine is $4.50 per liter. The other brands are priced between those two levels. Red California Wineries' wants to know your approach regarding the production costs and profitability per liter of Northern wine and Southern wine under each of the three costing systems. Present your proposal