Question

Schultz Electronics manufactures two ultra high-definition television models: the Royale which sells for $1,530, and a new model, the Majestic, which sells for $1,270. The production cost computed per unit under traditional costing for each model in 2017 was as follows.

Traditional Costing		Royale		Majestic
Direct materials		$610		$400
Direct labor ($20 per hour)		120		100
Manufacturing overhead ($41 per DLH)		246		205
Total per unit cost		$976		$705

In 2017, 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 expected manufacturing overhead of $8,165,000 by the total direct labor hours (200,000) for the two models.

Under traditional costing, the gross profit on the models was Royale $554 ($1,530 – $976) and Majestic $565 ($1,270 – $705). 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, 2017.

Activity Cost Pools		Cost Drivers		Estimated Overhead		Expected Use of Cost Drivers		Activity-Based Overhead Rate
Purchasing		Number of orders		$1,280,300		41,300		$31/order
Machine setups		Number of setups		942,300		17,450		$54/setup
Machining		Machine hours		5,185,800		120,600		$43/hour
Quality control		Number of inspections		756,600		29,100		$26/inspection

The cost drivers used for each product were:

Cost Drivers		Royale		Majestic		Total
Purchase orders		17,800		23,500		41,300
Machine setups		4,650		12,800		17,450
Machine hours		75,000		45,600		120,600
Inspections		11,100		18,000		29,100

(a)

Assign the total 2017 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 Amount ($ Overhead Cost Activity Total Cost per driver $ 1280300/41300 = $ Purchasing Machine setup 12,80,300 41300 31 per order $ 942300/17450 54 per setup 9,42,300 17450 5185800/120600 $ $ Machining 51,85,800 120600 43 per hour $ 756600/29100 $ Quality control 7,56,600 26 per inspection 29100 = Allocation of Overhead cost and computing Overhead cost per unit Cost per Royale Alllocated Royale Alllocated driver (a) Cost (ax c) Overhead Cost Royale (b) Cost (a x b) Majestic (c) $ $ $ Purchasing 17800 orders 23500 orders 31 5,51,800 7,28,500 Machine setup 4650 setups $ 12800 setups $ 2,51,100 6,91,200 54 $ $ $ Machining 75000 hours 45600 hours 19,60,800 43 32,25,000 18000 inspections Quality control Total Allocated Costs (i) $ 11100 inspections $ $ 26 2,88,600 4,68,000 $ $ 43,16,500 38,48,500 No of Units (ii) 25000 units 10000 units (i/ii) $ 384.85 Cost per unit 172.66 Particulars Royale Majestic Total assigned costs $ 43,16,500 $ 172.66 $ 38,48,500 $ Cost per unit 384.85

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