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P 9–3: Dürnstein Schnapps
Durnstein Schnapps produces three types of schnapps from locally grown Austrian pears, plums, and cherries. Schnapps is a
clear, colorless beverage distilled from fermented fruit that normally contains about 40 percent alcohol. The pear and plum
schnapps are produced using an identical process whereby the pears, and plums are fermented and then distilled. The cherry
schnapps employs a similar production process but requires more direct labor to produce the unique and highly prized Durnstein
Cherry Schnapps. Each variety of schnapps (pears, plums, and cherries) is produced in batches of 500 liters and then bottled.
Durnstein Schnapps uses an absorption costing system to assign overhead to its three products for inventory costing. A
single, predetermined, plantwide overhead rate is computed using a flexible manufacturing overhead budget. Variable
manufacturing overhead is budgeted to be €16.00 per direct labor hour and fixed manufacturing overhead is budgeted to be €
845,000 for the year. The following table summarizes budgeted and operating data for the last fiscal year.
Pear Plum Cherry
Actual batches
520 370 210
Budgeted number of batches 500 400 200
Actual direct hours per batch 17 15 34
Budgeted direct labor hours per
18 18 35
batch
Durnstein Schnaps incurred actual manufacturing overhead last year of € 1,250,500.
Required:
a. Calculate Durnstein Schnapp's plantwide overhead rate for last year.
b. One batch of plum schnapps used 20 direct labor hours. How much manufacturing overhead was absorbed by this one
batch?
c. How much over/underabsorbed overhead did Dürnstein Schnapps have last year?
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d. Recommend discuss how Durnstein Schnapps is likely to account for the over/underabsorbed overhead you
calculated in part(c).

Dürnstein Schnapps

a. Durnstein Schnapp's Plantwide Overhead Rate for last year:

= Budgeted overhead/total budgeted direct labour hours

= €  1,216,200/23,200

= €52.42

b. Manufacturing overhead absorbed by one batch of plum schnapps using 20 direct labor hours

= Overhead rate * direct labor hours

= €52.42 * 20

= €1,048.40

c. Determination of over/underabsored overhead last year:

= Total budgeted manufacturing overhead minus actual manufacturing overhead

= €  1,216,200 - € 1,250,500

= € 34,500 under absorbed

d. Durnstein Schnapps will adjust the cost of goods sold and the ending inventory in order to account for the underabsored overhead in part (c).

The purpose is to reflect eh true absorption cost of products and ending inventory.

Explanation:

Data and Calculations:

Variable manufacturing overhead (budgeted) = €16.00 per direct labor

Fixed manufacturing overhead (budgeted) = € 845,000 for the year

Budgeted and operating data for the last fiscal year:

                                                    Pear            Plum            Cherry

Actual batches                             520              370               210

Budgeted number of batches   500              400               200

Actual direct hours per batch       17                 15                  34

Budgeted direct labor hours per  18                 18                   35

batch

Total budgeted direct labor hours

  (500*18)   (400*18)   (200*35)   9,000         7,200          7,000    23,200

Total actual direct labor hours

 (520 * 17)  (370 * 15) ( 210 * 34) 8,840          5,550         7,140      21,530

Durnstein Schnaps incurred actual manufacturing overhead last year of € 1,250,500.

Budgeted manufacturing last year = Budgeted direct labor hours * Variable manufacturing overhead per direct labour hour + Budgeted fixed manufacturing overhead

= 23,200 x  €16.00 + €  845,00

= €371,200 + €845,00

= €  1,216,200

b) Absorption costing is a method that Durnstein Schnapps can use to calculate the costs of its variety of schnapps by including direct and indirect costs.  It is not like marginal or variable costing method that uses only the variable elements of production costs in arriving at the costs of Durnstein schnapps.  The absorption costing method tries to capture all production costs and absorb them into the costs of the pear, plums, and cherries schnapps in order to determine their appropriate prices.  Variable costing method does not treat overhead production costs as product costs, but as period costs.

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