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 $1,270. The production cost computed per unit under traditional costing for each model in 2020 was as follows. Traditional Costing Direct materials Direct labor ($20 per hour) Manufacturing overhead ($38 per DLH) Total per unit cost Royale Majestic $600 $390 120100 228 $948 $680 190 In 2020, Schultz manufactured 25,000 units of the Royale and 10,000 units of the Majestic. The overhead rate of $38 per direct labor hour was determined by dividing total estimated manufacturing overhead of $7.508.000 by the total direct labor hours (200,000) for the two models. Under traditional costing, the gross profit on the models was Royale $532 ($1,480 - $948) and Majestic $590 ($1,270 - $680). 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 Purchasing Number of orders Machine setups Number of setups Machining Machine hours Quality control Number of inspections Estimated Overhead $1,178,000 816,000 4,838,000 676,000 Estimated Use of Activity-Based Cost Drivers Overhead Rate 38,000 $31/order 16,000 $51/setup 118,000 $41/hour 26,000 $26/inspection The cost drivers used for each product were: Cost Drivers Royale Majestic Total Purchase orders 16,000 22,000 38,000 Machine setups 4,000 12,000 16,000 Machine hours 74,000 44,000 118,000 Inspections 10,000 16,000 26,000

Answer 1

Solutions:

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	$11,78,000.00	Purchase orders	38000	$31.00	16000	$4,96,000.00	22000	$6,82,000.00
Machine Setups	$8,16,000.00	Machine Setups	16000	$51.00	4000	$2,04,000.00	12000	$6,12,000.00
Machining	$48,38,000.00	Machine hours	118000	$41.00	74000	$30,34,000.00	44000	$18,04,000.00
Quality control	676000.00	Inspections	26000	$26.00	10000	$2,60,000.00	16000	$4,16,000.00
Total	$75,08,000.00					$39,94,000.00		$35,14,000.00
Nos of units						25000		10000
Overhead cost per unit						$159.76		$351.40

Computation of Per unit Cost - ABC
Particulars	Royale	Majestic
Direct material	$600.00	$390.00
Direct labor	$120.00	$100.00
Manufacturing overhead	$159.76	$351.40
Cost per unit	$879.76	$841.40
Computation of Gross Profit - ABC
Particulars	Royale	Majestic
Sales	$1,480.00	$1,270.00
Cost of goods sold	$879.76	$841.40
Gross Profit per unit	$600.24	$428.60