Problem 4-2A (Part Level Submission) Schultz Electronics manufactures two large-

Question

Problem 4-2A (Part Level Submission)

Schultz Electronics manufactures two large-screen television models: the Royale which sells for $1,546, and a new model, the Majestic, which sells for $1,315. The production cost computed per unit under traditional costing for each model in 2014 was as follows.

In 2014, 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 $8,154,010 by the total direct labor hours (200,000) for the two models.

Under traditional costing, the gross profit on the models was Royale $540 or ($1,546 – $1,006), and Majestic $600 or ($1,315 – $715). 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, 2014.

The cost drivers used for each product were:

Assign the total 2014 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.)

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

Traditional Costing Royale Majestic Direct Materials $640 $410 Direct Labor ($20 per hour) 120 100 Manufacturing Overhead ($41 per DLH) 246 205 Total per unit cost $1006 $715

Explanation / Answer

calculation of cost per unit as per ABC

Working note

1.

Total Purchase oreder cost-Royal=no of orders*cost per order=$16,510*$35=$577,850

so Purchase oreder cost per unit-Royal=$577,850/no ofunits=$577,850/25,000=$23.11

Total Purchase oreder cost-Majestic=no of orders*cost per order=$23,360*$35=$817,600

so Purchase oreder cost per unit-Majestic=$817,600/no ofunits=$817,600/25,000=$81.76

2.

Machine setup cost per unit-Royal=5,270*$53/25,000=$11.17

Machine setup cost per unit-Majestic=12,980*$53/10,000=$68.79

3

Machine related cost per unit-Royal=75,660*$41/25,000=$124.08

Machine related cost per unit-Majestic=45,730*$41/10,000=$187.5

4.

Inspection cost per unit-Royal=11,900*$29/25,000=$13.80

Inspection cost per unit-Majestic=16,180*$29/10,000=$46.92

partciulars    working note no Royale per unit Majestic per unit Material cost $640 $410 Labour cost $120 $100 Purchase order cost 1 $23.11 $81.76 Set up cost 2 $11.17 $68.79 machine related cost 3 $124.08 $187.5 Inspection cost 4 $13.80 $46.92 Total $932.16 $894.97

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