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 $1,270. The production cost computed per unit under traditional costing for each model in 2020 was as follows.

Traditional Costing		Royale		Majestic
Direct materials		$640		$430
Direct labor ($20 per hour)		120		100
Manufacturing overhead ($39 per DLH)		234		195
Total per unit cost		$994		$725

In 2020, Schultz manufactured 25,000 units of the Royale and 10,000 units of the Majestic. The overhead rate of $39 per direct labor hour was determined by dividing total estimated manufacturing overhead of $7,887,400 by the total direct labor hours (200,000) for the two models.

Under traditional costing, the gross profit on the models was Royale $486 ($1,480 – $994) and Majestic $545 ($1,270 – $725). 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		$1,209,000		39,000		$31/order
Machine setups		Number of setups		980,500		18,500		$53/setup
Machining		Machine hours		4,883,100		119,100		$41/hour
Quality control		Number of inspections		814,800		29,100		$28/inspection

The cost drivers used for each product were:

Cost Drivers		Royale		Majestic		Total
Purchase orders		17,000		22,000		39,000
Machine setups		6,000		12,500		18,500
Machine hours		74,000		45,100		119,100
Inspections		11,000		18,100		29,100

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

Answer 1

Answer)

Calculation of cost per Unit

	Royal	Majestic
Direct Materials per unit	$640.00	$430.00
Direct Labor per unit	$120.00	$100.00
Manufacturing overheads per unit	$167.48	$370.04
Total cost per unit	$927.48	$900.04

Therefore cost per unit of Royal Television set is $ 927.48 per unit and Majestic Television set is $ 900.04 per unit.

Working Note:

Calculation of overhead cost per unit using Activity Based Costing

Cost pools	Cost Drivers	Activity rate	Royal	Majestic
Activity Consumed	Allocated overheads (In $)	Activity Consumed	Allocated overheads (In $)
Purchasing	Number of orders	$ 31 per order	17,000 purchase orders	527,000	22,000 purchase orders	682,000
Machine Setups	Number of setups	$ 53 per setup	6,000 Setups	318,000	12,500 Setups	662,500
Machining	Machine hours	$ 41 per hour	74,000 machine hours	3,034,000	45,100 machine hours	1,849,100
Quality Control	Number of inspections	$ 28 per inspection	11,000 Inspections	308,000	18,100 Inspections	506,800
Total Allocated overheads		4,187,000		3,700,400
Number of units Produced		25,000 Units		10,000 Units
Overhead cost per unit		167.48		370.04