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 ($43 per DLH) Total per unit cost Royale Majestic $600 $410 120 100 258 215 $978 $725 In 2020, Schultz manufactured 25,000 units of the Royale and 10,000 units of the Majestic. The overhead rate of $43 per direct labor hour was determined by dividing total estimated manufacturing overhead of $8,577,700 by the total direct labor hours (200,000) for the two models. Under traditional costing, the gross profit on the models was Royale $502 ($1,480 - $978) and Majestic $545 ($1,270 - $725). 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 Estimated Use of Activity-Based Overhead Cost Drivers Overhead Rate $1,346,400 40,800 $33/order 956,800 18,400 $52/setup 5,386,500 119,700 $45/hour 888,000 29,600 $30/inspection The cost drivers used for each product were: Cost Drivers Royale Majestic Total Purchase orders 17,000 23,800 40,800 Machine setups 5,000 13,400 18,400 Machine hours 74,000 45,700 119,700 Inspections 11,000 18,600 29,600

Answer 1

a.	Manufacturing overhead cost to the two products and overhead cost per unit:
		Royale	Majestic
	Total assigned cost	$ 44,81,000	$    40,96,700
	Cost per unit	$       179.24	$          409.67
			Royale		Majestic
	Overhead Rate	Rate	Driver's used	Cost assigned	Driver's used	Cost assigned	Total overhead
	Purchasing	$               33	17,000	$        5,61,000	23,800	$        7,85,400	$        13,46,400
	Machine Set up	$               52	5,000	$        2,60,000	13,400	$        6,96,800	$           9,56,800
	Machining	$               45	74,000	$     33,30,000	45,700	$     20,56,500	$        53,86,500
	Quality control	$               30	11,000	$        3,30,000	18,600	$        5,58,000	$           8,88,000
	Total assigned cost			$     44,81,000		$     40,96,700	$        85,77,700
	Units produced			25,000		10,000
	Cost per unit			$           179.24		$           409.67
	Cost per unit of each model :
b1.		Royale	Majestic
	Cost per unit	$       899.24	$          919.67
		Royale	Majestic
	Direct Material	$             600	$                410
	Direct Labour	$             120	$                100
	Manufacturing overheads (Taken from part a)	$       179.24	$          409.67
	Total cost per unit	$       899.24	$          919.67
	Gross profit of each model :
b2.		Royale	Majestic
	Gross profit	$       580.76	$          350.33
		Royale	Majestic
	Revenue	$         1,480	$            1,270
	Expenses	$       899.24	$          919.67
	Profit	$       580.76	$          350.33