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 2017 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 2017, 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 expected manufacturing overhead of $7,881,550 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, 2017.

Activity

Cost Pools

Cost Drivers

Estimated

Overhead

Expected Use of

Cost Drivers

Activity-Based

Overhead Rate

Purchasing Number of orders $1,202,800 38,800 $31/order

Machine setups Number of setups 967,250 18,250 $53/setup

Machining Machine hours 4,899,500 119,500 $41/hour

Quality control Number of inspections 812,000 29,000 $28/inspection

The cost drivers used for each product were:

Cost Drivers

Royale

Majestic

Total

Purchase orders 16,800 22,000 38,800

Machine setups 5,750 12,500 18,250

Machine hours 74,400 45,100 119,500

Inspections 10,900 18,100 29,000

(a)Assign the total 2017 manufacturing overhead costs to the two products using activity-based costing (ABC) and determine the overhead cost per unit

Answer 1