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)

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		$		$

Answer 1

Table showing per driver cost - Activity Based costing

Overhead cost	Amount	Activity Total		Cost per driver
Purchasing	1293600	39200	1293600/39200	33 per order
Machine set up	1020000	20000	102000/20000	51 per setup
Machining	5023000	119600	5023000/119600	42 per hour
Quality control	828900	30700	828900/30700	27 per inspection

Allocation of Overhead cost and computing overhead cost per unit.

Overhead cost	Cost per driver (a)	Royale (b)	Royale allocated cost (a * b)	Majestic (C)	Majestic allocated cost (a * c)
Purchasing	33	17000	561000	22200	732600
Machine set up	51	6000	306000	14000	714000
Machining	42	75000	3150000	44600	1873200
Quality control	27	12000	324000	18700	504900
Total Allocated cost			4341000		3824700
No. of units manufactured			25000 units		10000 units
Cost per unit			173.64		382.47

Particulars	Royale	Majestic
Total assigned cost	4341000	3824700
Cost per unit	173.64	382.47