ACC 349 Week 3 Mendocino Corporation produces two grades of wine from grapes that it buys from California growers

ACC 349 Week 3 (Week Three)

Problem 4-4A (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.
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 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.

Check: (a) Cost/liter—C.D. $1.078; (c) Cost/liter—C.D. $.241


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(ACC 349 Week 3) Fontillas Instrument, Inc. manufactures two products: missile range instruments and space pressure gauges

ACC 349 Week 3

Exercise 4-11 (E4-11) Compute overhead rates and assign overhead using ABC.
Fontillas Instrument, Inc. manufactures two products: missile range instruments and space pressure gauges. During April, 50 range instruments and 300 pressure gauges were produced, and overhead costs of $89,500 were estimated. An analysis of estimated overhead costs reveals the following activities.
Activities Cost Drivers Total Cost
1. Materials handling Number of requisitions $35,000
2. Machine setups Number of setups 27,500
3. Quality inspections Number of inspections 27,000

The cost driver volume for each product was as follows.
Cost Drivers Instruments Gauges Total
Number of requisitions 400 600 1,000
Number of setups 200 300 500
Number of inspections 200 400 600

Instructions
1. Determine the overhead rate for each activity.
2. Assign the manufacturing overhead costs for April to the two products using activity-based costing.
3. Write a memorandum to the president of Fontillas Instrument explaining the benefits of activity-based costing.

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ACC 421 Week 3 During 2007 Pierson Company started a construction job with a contract price of $1,500,000

ACC 421 Week Three (Week 3)

Exercise 18-4 (E18-4) (Recognition of Profit on Long-Term Contracts) During 2007 Pierson Company started a construction job with a contract price of $1,500,000. The job was completed in 2009. The following information is available.

2007 2008 2009
Costs incurred to date $400,000 $935,000 $1,070,000
Estimated costs to complete 600,000 165,000 –0–
Billings to date 300,000 900,000 1,500,000
Collections to date 270,000 810,000 1,425,000

Instructions
(a) Compute the amount of gross profit to be recognized each year assuming the percentage-of-completion method is used.
(b) Prepare all necessary journal entries for 2008.
(c) Compute the amount of gross profit to be recognized each year assuming the completed-contract method is used.

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(Analysis of Percentage-of-Completion Financial Statements) In 2007, Beth Botsford Construction Corp. began construction work under a 3-year contract

ACC 421 Week 3

Exercise 18-5 (E18-5) (Analysis of Percentage-of-Completion Financial Statements) In 2007, Beth Botsford Construction Corp. began construction work under a 3-year contract. The contract price was $1,000,000. Beth Botsford uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of cost incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31, 2007, follow.
Balance Sheet
Accounts receivable—construction contract billings $21,500
Construction in progress $65,000
Less: Contract billings 61,500
Cost of uncompleted contract in excess of billings 3,500
Income Statement
Income (before tax) on the contract recognized in 2007 $18,200

Instructions
(a) How much cash was collected in 2007 on this contract?
(b) What was the initial estimated total income before tax on this contract?

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ACC 225 Week Three (Week 3) Solution

ACC 225
Axia College of University of Phoenix (UoP)
Financial Accounting

Larson, K. D., Wild, J. J., & Chiappetta B. (2005). Fundamental accounting principles (17th ed.)

Week Three (Week 3) Solution

Discussion Question 2
• Due Date: Day 4 [Main] forum
• Post your response to the following: The Ritz Manor is a popular seaside resort. A double room costs $220 for one night. In order to reserve a room, guests must pay one night’s stay in advance. On each floor of the hotel, Vendalite Company operates vending machines with energy bars, juices, and other snacks for guests. Vendalite stocks the
machines and collects revenue every week. Total average weekly revenue from these machines is $720. The Ritz Manor is entitled to 30% of the revenue from the machines. Vendalite sends a check to the Ritz Manor once at the end of each quarter for the resort’s share of the revenue.
o Based on this information, what type of adjusting entries does the Ritz Manor have?
o How are the amounts of these adjustments determined?
o Which accounts are affected?


CheckPoint: Adjustments and Accrual and Cash Basis Accounting
• Resource: Fundamental Accounting Principles, pp. 116-118 and 120
• Due Date: Day 5 [Individual] forum
• Complete Quick Study questions QS 3-1 and QS 3-9 on pp. 116 and 117 and Exercises 3-1 and 3-7 on pp. 118 and 120.
• Post your answers as an attachment.

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