Question

Schultz Electronics manufactures two ultra high-definition television models. the Royale which sells for $1.580, 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. -15 Traditional Costing Direct materials Direct labor ($20 per hour) Manufacturing overhead ($40 per DLH) Total per unit cost Royale $660 120 Majestic $400 100 200 $700 240 $1020 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 $8,045,000 by the total direct labor hours (200.000) for the two models. Under traditional costing, the gross profit on the models was Royale $560 ($1.580 - $1.020) and Majestic $620 ($1,320 - $700. 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 Purchasing Machine setups Machining Quality control Cost Drivers Number of orders Number of setups Machine hours Number of inspections Estimated Overhead $1,308,800 936,000 5.069,400 730,800 Estimated Use of Cost Drivers 40,900 18.000 120,700 26.100 Activity-Based Overhead Rate $32/order $52/setup S42/hour $28/inspection

Answer 1

Ans:

1. Overhead cost using ABC method:

Particulars	Royale	Majestic	Total
Purchase Orders	{32*18,000}	32*22,900
	576,000	732,800	1,308,800
Machine Setups	{52*5,000}	52*13,000
	260,000	676,000	936,000
machine Hours	{42*76,000}	42*44,700
	3,192,000	1,877,400	5,069,400
Inspections	{28*10,000}	28*16,100
	280,000	450,800	730,800
Total	4,308,000	3,737,000

Overhead cost per unit

For Royale= Overhead cost Allocated/number of Units

=> 4,308,000/25,000(Given)

=> 172.32

For Majestic= Overhead Cost Allocated/Number of units

=> 3,737,000/10,000(Given)

=> 373.70

2. calculation of Cost per Unit As per ABC Costing:

Particulars	Royale	Majestic
Direct materials	660	400
Direct Labor	120	100
Manufacturing overhead	172.32	373.70
Total	952.32	873.70

3. Gross Profit Per unit

Particulars	Royale	Majestic
SP Per unit	1,580	1,320
Less: Cost per Unit	952.32`	873.70
Gross Profit Per unit	627.68	446.30