Question

Schultz Electronics manufactures two ultra high-definition television models: the Royale which sells for $1,530, and a new model, the Majestic, which sells for $1,270. The production cost computed per unit under traditional costing for each model in 2017 was as follows.

Traditional Costing		Royale		Majestic
Direct materials		$640		$400
Direct labor ($20 per hour)		120		100
Manufacturing overhead ($40 per DLH)		240		200
Total per unit cost		$1,000		$700

In 2017, Schultz manufactured 25,000 units of the Royale and 10,000 units of the Majestic. The overhead rate of $40 per direct labor hour was determined by dividing total expected manufacturing overhead of $8,063,250 by the total direct labor hours (200,000) for the two models.

Under traditional costing, the gross profit on the models was Royale $530 ($1,530 – $1,000) and Majestic $570 ($1,270 – $700). 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, 2017.

Activity Cost Pools		Cost Drivers		Estimated Overhead		Expected Use of Cost Drivers		Activity-Based Overhead Rate
Purchasing		Number of orders		$1,283,200		40,100		$32/order
Machine setups		Number of setups		1,055,450		19,190		$55/setup
Machining		Machine hours		5,014,800		119,400		$42/hour
Quality control		Number of inspections		709,800		27,300		$26/inspection

The cost drivers used for each product were:

Cost Drivers		Royale		Majestic		Total
Purchase orders		16,500		23,600		40,100
Machine setups		5,790		13,400		19,190
Machine hours		74,500		44,900		119,400
Inspections		10,900		16,400		27,300

Answer 1

Allocation of Overhead Cost
Under ABC Costing
	Royale	Majestic
Purchasing	528000	755200
	$32 X 16500 Nos	$32 X 23600 Nos
Machine Setups	318450	737000
	$55 X 5790 Nos	$55 X 13400 Nos
Machine hours	3,129,000	1,885,800
	$42 X 74500 Nos	$42 X 44900 Nos
Quality Control	283400	426400
	$26 X 10900 Nos	$26 X 16400 Nos
Total	4,258,850	3,804,400
Calculation of Overhead Cost per Unit
	Royale	Majestic
Overhead Cost Allocated	4,258,850	3,804,400
No. of Units	25,000	10,000
Overhead Cost per Unit	170.35	380.44

Calculation of Cost Per Unit
Under ABC Costing
	Royale	Majestic
Direct Materials	640.00	400.00
Direct Labor	120.00	100.00
Manufacturing Overhead	170.35	380.44
Total Cost per Unit	930.35	880.44

Calculation of Gross Profit Per Unit
Under ABC Costing
	Royale	Majestic
SP per Unit	1,530.00	1,270.00
Less: Cost per Unit	930.35	880.44
Gross Profit Per Unit	599.65	389.56