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 2017 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 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 $8,131,020 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, 2017.

Activity Cost Pools		Cost Drivers		Estimated Overhead		Expected Use of Cost Drivers		Activity-Based Overhead Rate
Purchasing		Number of orders		$1,290,300		39,100		$33/order
Machine setups		Number of setups		1,010,820		19,820		$51/setup
Machining		Machine hours		5,006,400		119,200		$42/hour
Quality control		Number of inspections		823,500		30,500		$27/inspection

The cost drivers used for each product were:

Cost Drivers		Royale		Majestic		Total
Purchase orders		16,900		22,200		39,100
Machine setups		5,820		14,000		19,820
Machine hours		74,600		44,600		119,200
Inspections		11,800		18,700		30,500

(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

	Royale	Majestic
Total assigned costs	4306320	3824700
Cost per unit	172.25	382.47
Workings:
	Royale	Majestic
Purchasing	557700	732600
Machine setups	296820	714000
Machining	3133200	1873200
Quality control	318600	504900
Total assigned costs	4306320	3824700
Divide by units	25000	10000
Cost per unit	172.25	382.47
	Royale	Majestic
Purchasing	=16900*33	=22200*33
Machine setups	=5820*51	=14000*51
Machining	=74600*42	=44600*42
Quality control	=11800*27	=18700*27