Polzin 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 CoolDay. It sells
this in 600,000 5-liter jugs. Polzin 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.
Greg Kagen, president and founder of Polzin, 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 simple 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.
Greg 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 $0.25 $0.50
Direct labor hours per liter 0.05 0.09
Total direct labor hours 150,000 27,000
Activity Cost Pool Cost Driver Estimated Expected Expected Use of
Overhead Use of Cost Drivers per Product
Cost Drivers CoolDay LiteMis
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 Number of inspections240,800 800 350 450
inspect equipment
Total estimated overhead $1,241,660
Requirement:
- Under traditional product costing using direct labor hours, compute the total manufacturing cost per liter of both products.
- Under ABC, prepare a schedule showing the computation of the activity-based overhead rates (per cost driver).
- Prepare a schedule assigning each activity\'s overhead cost pool to each product, based on the use of cost drivers. What is the overhead cost per liter?
- Compute the total manufacturing cost per liter for both products under ABC.
