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 $1,320. The production cost computed per unit under traditional costing for each model in 2020 was as follows.

Traditional Costing		Royale		Majestic
Direct materials		$660		$420
Direct labor ($20 per hour)		120		100
Manufacturing overhead ($40 per DLH)		240		200
Total per unit cost		$1,020		$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		Cost Drivers		Estimated Overhead		Estimated Use of Cost Drivers		Activity-Based Overhead Rate
Purchasing		Number of orders		$1,196,600		38,600		$31/order
Machine setups		Number of setups		911,600		17,200		$53/setup
Machining		Machine hours		5,218,400		118,600		$44/hour
Quality control		Number of inspections		772,200		29,700		$26/inspection

The cost drivers used for each product were:

Cost Drivers		Royale		Majestic		Total
Purchase orders		16,000		22,600		38,600
Machine setups		5,000		12,200		17,200
Machine hours		74,000		44,600		118,600
Inspections		12,000		17,700		29,700

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, e.g. 12.25.)

Total assigned costs for Royale =

Total assigned costs for Majestic =

Cost per unit Royale =

Cost per unit Majestic =

Answer 1

*Total assigned costs for Royale= $4,329,000;

*Total assigned costs for Majestic= $3,769,800;

*Cost per unit Royale= $173.16;

*Cost per unit Majestic= $376.98.

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Workings: Activity Cost Pools Purchasing Machine Setups Machining Quality Control Cost Driver Estimated OH COST Number of orders $ 1,196,600 Number of setups $ 911,600 Machine hours $ 5,218,400 Number of inspections $ 772,200 $ 8,098,800 Activity level 38,600 $ 17,200 $ 118,600 $ 29,700 $ Activity Rate 31.00 53.00 44.00 26.00 Activity Cost Pools Purchasing Machine Setups Machining Quality Control Total assigned costs (a) Units Produced (b) Cost per unit[(a)*(b)] Royale Estimated Use of Drivers Activity-Based OH Rate Cost Assigned 16,000 31.00 $ 496,000 5,000 53.00 $ 265,000 74,000 44.00 $ 3,256,000 12,000 26.00 $ 312,000 $ 4,329,000 25,000 $ 173.16 Majestic Estimated Use of Drivers Activity-Based OH Rate 22,600 31.00 $ 12,200 53.00 $ 44,600 44.00 $ 17,700 26.00 $ $ Cost Assigned 700,600 646,600 1,962,400 460,200 3,769,800 10,000 376.98 $ Royale Majestic 420 Particulars Direct Production Costs Manufacturing Overhead Cost Overhead Cost Total per unit cost $ $ $ 100 660 $ 120$ 173 $ 953 $ 377 $ 897

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