Question

Schultz Electronics manufactures two ultra high-definition television models: the Royale which sells for $1,630, 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 ($41 per DLH) Total per unit cost Royale Majestic $600 $430 120 100 246 205 $966 $735 In 2020. Schultz manufactured 25,000 units of the Royale and 10,000 units of the Majestic. The overhead rate of $41 per direct labor hour was determined by dividing total estimated manufacturing overhead of $8,135,200 by the total direct labor hours (200,000) for the two models. Under traditional costing the gross profit on the models was Royale $664 ($1,630 - $966) and Majestic $535 ($1.270 - $735). 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 $1.258,600 1,026,000 5,035,800 814,800 Estimated Use of Activity-Based Cost Drivers Overhead Rate 40,600 $31/order 19,000 $54/setup 119,900 $42/hour 29,100 $28/inspection The cost drivers used for each product were: Cost Drivers Royale Majestic Purchase orders 18,000 22,600 Machine setups 5,000 14.000 Machine hours 74,000 45,900 Inspections 11,000 18,100 Total 40,600 19.000 119,900 29.100 (a) Assign the total 2020 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, eg. 12.25.) Royale Majestic Total assigned costs $ Cost per unit $

Answer 1

Solution

	Royale	Majestic
Overhead allocated	$      4,244,000.00	$   3,891,200.00
Overhead cost per unit	$ 169.76	$               389.12

Working

Cost assigned to Royale
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Purchasing	$           31.00	18,000.00	$ 558,000
Machine setups	$           54.00	5,000.00	$ 270,000
Machining	$           42.00	74,000.00	$ 3,108,000
Quality Control	$           28.00	11,000.00	$ 308,000
Total Overheads assigned			$ 4,244,000
Production			25,000.00
Overhead cost per unit			$ 169.76

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Cost assigned to Majestic
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Purchasing	$           31.00	22600	$ 700,600
Machine setups	$           54.00	14000	$ 756,000
Machining	$           42.00	45900	$ 1,927,800
Quality Control	$           28.00	18100	$ 506,800
Total Overheads assigned			$ 3,891,200
Production			10,000.00
Overhead cost per unit			$              389.12