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 $1,320. The production cost computed per unit under traditional costing for each model in 2017 was as follows.

Traditional Costing		Royale		Majestic
Direct materials		$610		$410
Direct labor ($20 per hour)		120		100
Manufacturing overhead ($40 per DLH)		240		200
Total per unit cost		$970		$710

In 2017, 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 expected manufacturing overhead of $8,037,860 by the total direct labor hours (200,000) for the two models.

Under traditional costing, the gross profit on the models was Royale $560 ($1,530 – $970) and Majestic $610 ($1,320 – $710). 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		$1,280,000		40,000		$32/order
Machine setups		Number of setups		976,260		18,420		$53/setup
Machining		Machine hours		5,048,400		120,200		$42/hour
Quality control		Number of inspections		733,200		28,200		$26/inspection

The cost drivers used for each product were:

Cost Drivers		Royale		Majestic		Total
Purchase orders		16,800		23,200		40,000
Machine setups		5,720		12,700		18,420
Machine hours		74,700		45,500		120,200
Inspections		10,200		18,000		28,200

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

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

Royale

Majestic

c) Calculate gross profit of each model using ABC costing. (Round answers to 2 decimal places, e.g. 12.25.)

Answer 1

SOLUTION:

PARTICULARS	ROYALE	MAJESTIC
Total Cost Assigned	$ 5,023,360	$ 3,794,500
Cost per unit	$ 200.93	$ 379.45
Total Cost per unit (ABC)	$ 930.93	$ 889.45
Gross Margin per unit	$ 599.07	$ 430.55

CALCULATIONS:

a) Computation of Total cost assigned (ABC costing) and Overhead Cost per unit :

For Royale

Activity	Activity Rate	Cost Drivers	Cost Assigned
Purchasing	$ 32	16,800	$ 537,600
Machine setups	$ 53	5,720	$ 303,160
Machine Hours	$ 42	74,700	$ 3,137,400
Inspections	$ 26	10,200	$ 1,045,200
Total Cost Assigned			$ 5,023,360
No of units			25,000
Cost per unit			$ 200.93

For Majestic

Activity	Activity Rate	Cost Drivers	Cost Assigned
Purchasing	$ 32	23,200	$ 742,400
Machine setups	$ 53	12,700	$ 673,100
Machine Hours	$ 42	45,500	$ 1,911,000
Inspections	$ 26	18,000	$ 468,000
Total Cost Assigned			$ 3,794,500
No of units			10,000
Cost per unit			$ 379.45

b) Computation of Cost per Unit (ABC):

	Royale	Majestic
Direct Material	$ 610.00	$ 410.00
Direct Labor	$ 120.00	$ 100.00
Overhead Cost	$ 200.93	$ 379.45
Total Cost per unit (ABC)	$ 930.93	$ 889.45

c) Computaion of Gross Profit (ABC):

	Royale	Majestic
Sale Price	1,530	1,320
Cost per unit	(930.93)	(889.45)
Gross Margin per unit	$ 599.07	$ 430.55