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		$600		$430
Direct labor ($20 per hour)		120		100
Manufacturing overhead ($41 per DLH)		246		205
Total per unit cost		$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 $8,165,700 by the total direct labor hours (200,000) for the two models.

Under traditional costing, the gross profit on the models was Royale $514 ($1,480 – $966) and Majestic $585 ($1,320 – $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		Estimated Overhead		Estimated Use of Cost Drivers		Activity-Based Overhead Rate
Purchasing		Number of orders		$1,293,600		39,200		$33/order
Machine setups		Number of setups		1,020,000		20,000		$51/setup
Machining		Machine hours		5,023,200		119,600		$42/hour
Quality control		Number of inspections		828,900		30,700		$27/inspection

The cost drivers used for each product were:

Cost Drivers		Royale		Majestic		Total
Purchase orders		17,000		22,200		39,200
Machine setups		6,000		14,000		20,000
Machine hours		75,000		44,600		119,600
Inspections		12,000		18,700		30,700

(a)

Correct answer iconYour answer is correct.

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.)

		Royale		Majestic
Total assigned costs		$		$
Cost per unit		$		$

  

Attempts: 1 of 7 used

(b1)

Calculate cost per unit of each model using ABC costing. (Round answers to 2 decimal places, e.g. 12.25.)

		Royale		Majestic
Cost per unit		$		$

Answer 1

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Answer a
Royale		A	B	C=A*B
Activity cost pool	Activity Measure	ABC Rates	Activity used	Cost assigned
Purchasing	Number of orders	33.00	17,000.00	561,000.00
Machine Setups	Number of setups	51.00	6,000.00	306,000.00
Machining	Machine hours	42.00	75,000.00	3,150,000.00
Quality Control	Number of inspections	27.00	12,000.00	324,000.00
Overhead cost assigned				4,341,000.00
Majestic		A	B	C=A*B
Activity cost pool	Activity Measure	ABC Rates	Activity used	Cost assigned
Purchasing	Number of orders	33.00	22,200.00	732,600.00
Machine Setups	Number of setups	51.00	14,000.00	714,000.00
Machining	Machine hours	42.00	44,600.00	1,873,200.00
Quality Control	Number of inspections	27.00	18,700.00	504,900.00
Overhead cost assigned				3,824,700.00
Overhead cost per unit	Royale	Majestic	Note
Overhead cost assigned	4,341,000.00	3,824,700.00	See C
Number of units	25,000.00	10,000.00	D
Overhead cost per unit	173.64	382.47	E=C/D
Answer b1	Royale	Majestic	Note
Direct materials	600.00	430.00
Direct labor	120.00	100.00
Overhead cost per unit	173.64	382.47
Cost per unit- ABC	893.64	912.47