Question

AutoSave On B 2 ExcelTemplateAssignment, Ch04 (5) - Excel Search File Home Insert Page Layout Formulas Data Review View HelpDYMO Label QuickBooks ✓ P4-2A Assign overhead to products using ABC and evaluate decision A B C D E F G H I J K 1 P4-2A Assign overhead to products using ABC and evaluate decision 2 Schultz Electronics manufactures two ultra high-definition television models: the Royale which sells for $1,600 and 3 a new model, the Majestic, which sells for $1,300. The production cost computed per unit under traditional costing 4 for each model in 2017 as follows. Majestic 6 Traditional Costing 7 Direct materials 8 Direct labor ($20 per hours) 9 Manufacturing overhead ($38 per DLH) 10 Total per unit cost $420 Royale $700 120 228 $1.048 100 190 $710 12 in 2017. Schultz manufactured 25,000 units of the Royale and 10,000 units of the Majestic. The overhead rato of 13 $38 per direct labor hour was determined by dividing total expected manufacturing overhead of $7,600,000 by the 14 total direct labor hours (200,000) for the two models. 15 Under traditional costing, the gross profit on the models was Royal 652 ($1,600 - $1,048) and Majestic $590 16 ($1,300 - $710). Because of this difference, management is considering phasing out the Royale model and increasing 17 the production of the Majestic model. 18 Before Fnalizing its decision, management asks Schultz's controller to preparo an analysis using activity-based 19 costing (ABC). The controller accumulates the following Information about overhead for the year ended December 31, 2017 22 Activity 23 Cost Pools Cost Drivers 24 Purchasing Number of orders 25 Machine setups Number of setups 26 Machining Machino hours 27 Quality control Number of Inspections 28 29 The cost drivers used for each product were: Estimated Overhead $1,200,000 900,000 4,800,000 700,000 Estimated Use of Cost Drivers 40,000 18,000 120,000 28,000 Activity-Based Rates $30/order $50/setup $40/hour $26/inspection Cost Drivers Royale Purchase orders 17.000 Machine setups 6,000 Machine hours 75,000 Inspections 14- 154- 4E4-9 P4-14 P4-2A CD Total 40,000 Malestic 23,000 13.000 45,000 17.000 18.000 120.000 11,000 28,000 Type here to search 0

Answer 1

a.

	Royal		Majestic		Total Overhead
Overhead rate	Drivers Used	Cost assigned	Drivers Used	Cost assigned
Purchase Orders @$30	17000	$        510,000	23000	$         690,000	$    1,200,000
Machine Setups @$50	5000	$        250,000	13000	$         650,000	$        900,000
Machine hours @$40	75000	$    3,000,000	45000	$     1,800,000	$    4,800,000
Inspections @$25	11000	$        275,000	17000	$         425,000	$        700,000
Total Assigned costs		$    4,035,000		$     3,565,000	$    7,600,000
Units Produced		25000		10000
Overhead Cost per unit		$          161.40		$           356.50

b.

	Royale	Majestic
Direct Material	$            700.00	$          420.00
Direct labor	$            120.00	$          100.00
Manufacturing Overhead	$            161.40	$          356.50
Total Cost per unit	$            981.40	$          876.50
Sales Price per unit	$         1,600.00	$       1,300.00
Cost per unit	$            981.40	$          876.50
Gross Profit per unit	$            618.60	$          423.50

c. The managements plan is not sound, since it is clearly shown by ABC Costing analysis above that Royale Product is more profitable than Majestic.

Second Part

	Royal		Majestic		Total Overhead
Overhead rate	Drivers Used	Cost assigned	Drivers Used	Cost assigned
Purchase Orders @$30	19000	$        570,000	21000	$         630,000	$    1,200,000
Machine Setups @$50	5000	$        250,000	13000	$         650,000	$        900,000
Machine hours @$40	75000	$    3,000,000	45000	$     1,800,000	$    4,800,000
Inspections @$25	12000	$        300,000	16000	$         400,000	$        700,000
Total Assigned costs		$    4,120,000		$     3,480,000	$    7,600,000
Units Produced		25000		10000
Overhead Cost per unit		$          164.80		$           348.00

	Royale	Majestic
Direct Material	$            700.00	$          420.00
Direct labor	$            120.00	$          100.00
Manufacturing Overhead	$            164.80	$          348.00
Total Cost per unit	$            984.80	$          868.00
Sales Price per unit	$         1,600.00	$       1,300.00
Cost per unit	$            984.80	$          868.00
Gross Profit per unit	$            615.20	$          432.00

c. Still Product Royale is more profitable, so management should not phase out this product