Question

Schultz Electronics manufactures two ultra high-definition television models: the Royale which sells for $1,480, 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.

Traditional Costing		Royale		Majestic
Direct materials		$650		$410
Direct labor ($20 per hour)		120		100
Manufacturing overhead ($42 per DLH)		252		210
Total per unit cost		$1,022		$720

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 $8,476,600 by the total direct labor hours (200,000) for the two models.

Under traditional costing, the gross profit on the models was Royale $458 ($1,480 – $1,022) and Majestic $600 ($1,320 – $720). 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.

Activity Cost Pools		Cost Drivers		Estimated Overhead		Estimated Use of Cost Drivers		Activity-Based Overhead Rate
Purchasing		Number of orders		$1,258,600		40,600		$31/order
Machine setups		Number of setups		990,000		18,000		$55/setup
Machining		Machine hours		5,445,000		121,000		$45/hour
Quality control		Number of inspections		783,000		29,000		$27/inspection

The cost drivers used for each product were:

Cost Drivers		Royale		Majestic		Total
Purchase orders		17,000		23,600		40,600
Machine setups		6,000		12,000		18,000
Machine hours		75,000		46,000		121,000
Inspections		12,000		17,000		29,000

(b1)

Calculate cost per unit of each model using ABC costing. (Round answers to 2 decimal places, e.g. 12.25.)

		Royale		Majestic
Cost per unit		$

Answer 1

Solution: (b1) Compute cost per unit of each model using ABC costing Traditional Costing Royale Majestic Direct materials $ 650 $ 410 Direct labor ($20/hr) $ 120 $ 100 Manufacturing OH ($42 per DLH) $ 252 $ 210 Total per unit cost $ 1,022 $ 720 AB Costing Direct materials Direct labor ($20/hr) Manufacturing OH* Total per unit cost Royale Majestic $ 650.00 $410.00 $ 120.00 $ 100.00 $ 182.24 $ 392.06 $952.24 $ 902.06 * Computation of manufacturing overhead under AB Costing Royale Drivers Cost Activity Rate Used Assigned Purchasing 17,000 $527,000 Machine setups 6,000 $330,000 Machining 75,000 $3,375,000 Quality control 12,000 $324,000 Total assigned costs $4,556,000 Units produced 25,000 Cost per unit $182.24 Cost assigned = Divers used x Rate Majestic Drivers Cost Total Used Assigned Overhead 23,600 $731,600 $1,258,600 12,000 $660,000 $990,000 46,000 $2,070,000 $5,445,000 17,000 $459,000 $783,000 $3,920,600 $8,476,600 10,000 $392.06