Question

Problem 4-2A a, b1-b2 (Video) 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 Direct materials Direct labor ($20 per hour) Manufacturing overhead ($40 per DLH) Total per unit cost Royale $660 120 240 $1,020 Majestic $420 100 200 $720 In 2020, 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 estimated manufacturing overhead of $8,098,800 by the total direct labor hours (200,000) for the two models. Under traditional costing, the gross profit on the models was Royale $460 ($1,480 - $1,020) 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 Purchasing Machine setups Machining Quality control Cost Drivers Number of orders Number of setups Machine hours Number of inspections Estimated Overhead $1,196,600 911,600 5,218,400 772,200 Estimated Use of Cost Drivers 38,600 17,200 118,600 29,700 Activity-Based Overhead Rate $31/order $53/setup $44/hour $26/inspection The cost drivers used for each product were: Cost Drivers Purchase orders Machine setups Machine hours Inspections Royale 16,000 5,000 74,000 12,000 Majestic 22,600 12,200 44,600 17,700 Total 38,600 17,200 118,600 29,700

Answer 1

solution: Parta Activity Cost Pools | Activity-Based Overhead Rate cost driver used Royale Majestic Ic Latc | Purchasing Machine setups Machining Quality control total cost assigned / number of units overhead cost per unit 31 53 | 44 26 16,000 5,000 74,000 12,000 22,600 12,200 44,600 17,700 cost assigned Royale Majestic a*b 496,000 700,600 265,000 646,600 | 3,256,000 1,962,400 312,000 460,200 4,329,000 3,769,800 25,000 10,000 173.16 | 376.98 L oyale Part b. ABC Costing R Direct materials Direct labor ($20 per hour) Manufacturing overhead cost per unit 660.00 120.00 173.16 953.16 Majestic 420.00 100.00 376.98 896.98 Royale sale price Less: cost Gross profit Majestic 1480.00 1320.00 -953.16 -896.98 526.84 423.02 Part c: No, the management's future plans are not sound as Gross profit from Royale Model is more than the that of Majestics model.