Traditional Costing Royale Majestic $670 $420 120 100 246 205 $1,036 $725 Activi

Question

Traditional Costing

Royale

Majestic

$670

$420

120

100

246

205

$1,036

$725

Activities

Cost Drivers

Estimated
Overhead

Expected Use of
Cost Drivers

Activity-Based
Overhead Rate

Cost Drivers

Royale

Majestic

Total

A.) Assign the total 2014 manufacturing overhead costs to the two products using activity-based costing (ABC) and determine the overhead cost per unit.

B.) What was the cost per unit of each model using ABC costing.

C.) What was the gross profit of each model using ABC costing

PLEASE ANSWER ALL QUESTIONS!

Schultz Electronics manufactures two large-screen television models: the Royale which sells for $1,576, and a new model, the Majestic, which sells for $1,325. The production cost computed per unit under traditional costing for each model in 2014 was as follows.

Traditional Costing

Royale

Majestic

Direct materials

$670

$420

Direct labor ($20 per hour)

120

100

Manufacturing overhead ($41 per DLH)

246

205

Total per unit cost

$1,036

$725

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 $8,229,600 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 ($1,576 – $1,036), and Majestic $600 or ($1,325 – $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, 2014.

Activities

Cost Drivers

Estimated
Overhead

Expected Use of
Cost Drivers

Activity-Based
Overhead Rate

Purchasing Number of orders $1,340,460 40,620 $33/order Machine setups Number of setups 977,080 18,790 52/setup Machining Machine hours 5,087,880 121,140 42/hour Quality control Number of inspections 824,180 28,420 29/inspection
The cost drivers used for each product were:

Cost Drivers

Royale

Majestic

Total

Purchase orders 17,640 22,980 40,620 Machine setups 5,990 12,800 18,790 Machine hours 75,920 45,220 121,140 Inspections 11,000 17,420 28,420

Explanation / Answer

Royale Majestic Total Cost Cost Driver Drivers used Cost Drivers used Cost Assigned Purchase orders                      17,640 $               5,82,120                 22,980 $         7,58,340 $            13,40,460 Machine setups                        5,990                    3,11,480                 12,800             6,65,600 $              9,77,080 Machine hours                      75,920                 31,88,640                 45,220           18,99,240 $            50,87,880 Inspections                      11,000                    3,19,000                 17,420             5,05,180 $              8,24,180    Total costs assigned $             44,01,240 $       38,28,360 $            82,29,600    Units produced                       25,000                 10,000 Overhead Cost per Unit $                   176.05 $             382.84 Royale 420 Direct materials $                 670.00 $                   420.00 Direct labor                      120.00                       100.00 Manufacturing overhead                      176.05                       382.84      Total Cost per unit $                 966.05 $                   902.84 Sales price per unit $              1,576.00 $               1,325.00 Cost per unit                      966.05                       902.84 Gross profit per unit $                 609.95 $                   422.16

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