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For Neo P4-4A Assign overhead costs using traditional costing

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For Neo P4-4A    Assign overhead costs using traditional costing and ABC; compare results.
Mendocino 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 Mendocino 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.
Tyler Silva, president and founder of Mendocino, 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.
Tyler 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     120,000     25,000





Activity Cost Pools     Cost Drivers     Estimated Overhead     Expected Use of Cost Drivers     Expected Use of Cost Drivers per Product
                    CoolDay     LiteMist
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 inspect equipment     Number of inspections     240,800     800     350     450
                         
           $1,241,660                 

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.

(a)     Cost/liter—C.D. $1.078

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.
(c) Cost/liter—C.D. $.241
D.     Compute the total manufacturing cost per liter for both products under ABC.
E.     Write a memo to Tyler Silva 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.
Submitted: 8 years ago.
Category: Homework
Expert:  Neo replied 8 years ago.
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