Schultz Electronics manufactures two ultra high-definition television models: th

Question

Schultz Electronics manufactures two ultra high-definition television models: the Royale which sells for $ 1,580, 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 ($20 per hour) 120 100 Manufacturing overhead ($ 40 per DLH) 240 200 Total per unit cost $ 1,000 $ 730 In 2020, 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 estimated manufacturing overhead of $ 7,949,600 by the total direct labor hours (200,000) for the two models. Under traditional costing, the gross profit on the models was Royale $ 580 ($ 1,580 – $ 1,000) and Majestic $ 540 ($ 1,270 – $ 730). 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 $ 1,334,400 41,700 $ 32/order Machine setups Number of setups 894,400 17,200 $ 52/setup Machining Machine hours 4,961,000 121,000 $ 41/hour Quality control Number of inspections 759,800 26,200 $ 29/inspection The cost drivers used for each product were: Cost Drivers Royale Majestic Total Purchase orders 18,000 23,700 41,700 Machine setups 5,000 12,200 17,200 Machine hours 76,000 45,000 121,000 Inspections 10,000 16,200 26,200 (a)

Assign the total 2020 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 $ $

Explanation / Answer

Solution:

Allocation of overhead and computation of overhead cost per unit - ABC Activity Estimated Overhead Cost Activity Base Usage of Activity Base Activity Rate Royale Majestic Usage Allocated Costs Usage Allocated Costs Purchasing $1,334,400.00 Purchase orders 41700 $32.00 18000 $576,000.00 23700 $758,400.00 Machine Setups $894,400.00 Machine Setups 17200 $52.00 5000 $260,000.00 12200 $634,400.00 Machining $4,961,000.00 Machine hours 121000 $41.00 76000 $3,116,000.00 45000 $1,845,000.00 Quality control 759800.00 Inspections 26200 $29.00 10000 $290,000.00 16200 $469,800.00 Total $7,949,600.00 $4,242,000.00 $3,707,600.00 Nos of units 25000 10000 Overhead cost per unit $169.68 $370.76

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