Question

Question 3 Schultz Electronics manufactures two ultra high-definition television models: the Royale which sells for $1,580, and a new model, the Majestic, which sells for $1,320. The production cost computed per unit under traditional costing for each model in 2020 was as follows. Royale $650 Traditional Costing Direct materials Direct labor ($20 per hour) Manufacturing overhead ($42 per DLH) Total per unit cost Majestic $400 100 120 210 252 $1,022 $710 In 2020, Schultz manufactured 25,000 units of the Royale and 10,000 units of the Majestic. The overhead rate of $42 per direct labor hour was determined by dividing total estimated manufacturing overhead of $8,392,200 by the total direct labor hours (200,000) for the two models. Under traditional costing, the gross profit on the models was Royale $558 ($1,580 – $1,022) and Majestic $610 ($1,320 - $710). Because of this difference, management is considering phasing out the Royale model and increasing the production of the Majestic model. Before finalizing its decision, management asks Schultz's controller to prepare an analysis using activity-based costing (ABC). The controller accumulates the following information about overhead for the year ended December 31, 2020. Estimated Overhead Estimated Use of Cost Drivers Activity-Based Overhead Rate Cost Drivers $34/order Activity Cost Pools Purchasing Machine setups Machining Quality control $53/setup Number of orders Number of setups Machine hours Number of inspections $1,329,400 932,800 5,332,500 797,500 39,100 17,600 118,500 27,500 $45/hour $29/inspection

Answer 1

Solution:

Allocation of overhead and computation of overhead cost per unit - ABC
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Royale		Majestic
					Usage	Allocated Costs	Usage	Allocated Costs
Purchasing	$1,329,400.00	Purchase orders	39100	$34.00	17000	$578,000.00	22100	$751,400.00
Machine Setups	$932,800.00	Machine Setups	17600	$53.00	5000	$265,000.00	12600	$667,800.00
Machining	$5,332,500.00	Machine hours	118500	$45.00	74000	$3,330,000.00	44500	$2,002,500.00
Quality control	797500.00	Inspections	27500	$29.00	10000	$290,000.00	17500	$507,500.00
Total	$8,392,200.00					$4,463,000.00		$3,929,200.00
Nos of units						25000		10000
Overhead cost per unit						$178.52		$392.92

Computation of Per unit Cost - ABC
Particulars	Royale	Majestic
Direct material	$650.00	$400.00
Direct labor	$120.00	$100.00
Manufacturing overhead	$178.52	$392.92
Cost per unit	$948.52	$892.92

Computation of Gross Profit - ABC
Particulars	Royale	Majestic
Sales	$1,580.00	$1,320.00
Cost of goods sold	$948.52	$892.92
Gross Profit per unit	$631.48	$427.08