Question

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 $1,270. The production cost computed per unit under traditional costing for each model in 2017 was as follows.

Traditional Costing		Royale		Majestic
Direct materials		$640		$410
Direct labor ($20 per hour)		120		100
Manufacturing overhead ($42 per DLH)		252		210
Total per unit cost		$1,012		$720

In 2017, 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 expected manufacturing overhead of $8,419,350 by the total direct labor hours (200,000) for the two models.

Under traditional costing, the gross profit on the models was Royale $568 ($1,580 – $1,012) and Majestic $550 ($1,270 – $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, 2017.

Activity Cost Pools		Cost Drivers		Estimated Overhead		Expected Use of Cost Drivers		Activity-Based Overhead Rate
Purchasing		Number of orders		$1,205,900		38,900		$31/order
Machine setups		Number of setups		1,000,450		18,190		$55/setup
Machining		Machine hours		5,382,000		119,600		$45/hour
Quality control		Number of inspections		831,000		27,700		$30/inspection

The cost drivers used for each product were:

Cost Drivers		Royale		Majestic		Total
Purchase orders		16,700		22,200		38,900
Machine setups		4,890		13,300		18,190
Machine hours		75,300		44,300		119,600
Inspections		11,000		16,700		27,700

Assign the total 2017 manufacturing overhead costs to the two products using activity-based costing (ABC) and determine the overhead cost per unit. (Round cost per unit to 2 decimal places, e.g. 12.25.)

		Royale		Majestic
Total assigned costs		$		$
Cost per unit		$		$

AND

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		$		$

AND

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

		Royale		Majestic
Gross profit		$		$

Answer 1

Assign the total 2017 manufacturing overhead costs to the two products using activity- based costing (ABC) and determine the overhead cost per unit. Royale Majestic Total assigned costs L $4,505,150 $3,914,200 Cost per unit $180.21 $391.42 Calculate cost per unit of each model using ABC costing. Royale Cost per unit $940.21 Majestic $901.42 Calculate gross profit of each model using ABC costing. Royale Gross profit $639.79 Majestic $368.58 Explanation: Assign the total 2017 manufacturing overhead costs to the two products using activity-based costing (ABC) and determine the overhead cost per unit.

Royale Activity Cost Pools Drivers Used (A) Purchasing 16,700 Machine setups 4,890 Machining 75,300 Quality control 11,000 Total costs assigned (A) Units produced (B) Overhead cost per unit [(A) = (B)] Activity-Based Overhead Rates (B) $31.00 55.00 45.00 30.00 OH Allocated (A x B) $517,700 268,950 3,388,500 330,000 $4,505,150 25,000 $180.21 Majestic Activity Cost Pools Drivers Used (A) Purchasing 22,200 Machine setups 13,300 Machining 44,300 Quality control 16,700 Total costs assigned (A) Units produced (B) Overhead cost per unit [(A) = (B)] Activity-Based Overhead Rates (B) $31.00 55.00 45.00 30.00 OH Allocated (A + B) $688,200 731,500 1,993,500 501,000 $3,914,200 10,000 $391.42

Calculate cost per unit of each model using ABC costing. Direct materials per unit Direct labor per unit Overhead per unit Cost per unit Royale $640.00 120.00 180.21 $940.21 Majestic $410.00 100.00 391.42 $901.42 Calculate gross profit of each model using ABC costing. Selling price per unit Less: Cost per unit Gross profit per unit Royale $1,580.00 940.21 $639.79 Majestic $1,270.00 901.42 $368.58