Problem 4-2A Traditional Costing Royale Majestic $620 $420 120 100 246 205 $986

Question

Problem 4-2A

Traditional Costing

Royale

Majestic

$620

$420

120

100

246

205

$986

$725

Activity
Cost Pools

Cost Drivers

Estimated
Overhead

Expected Use of
Cost Drivers

Activity-Based
Overhead Rate

Cost Drivers

Royale

Majestic

Total

Royale

Majestic

LINK TO TEXT

Royale

Majestic

LINK TO TEXT

Royale

Majestic

Problem 4-2A

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 $1,320. The production cost computed per unit under traditional costing for each model in 2017 was as follows.

Traditional Costing

Royale

Majestic

Direct materials

$620

$420

Direct labor ($20 per hour)

120

100

Manufacturing overhead ($41 per DLH)

246

205

Total per unit cost

$986

$725

In 2017, 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 $8,217,010 by the total direct labor hours (200,000) for the two models.

Under traditional costing, the gross profit on the models was Royale $494 ($1,480 – $986) and Majestic $595 ($1,320 – $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 $1,232,000 38,500 $32/order Machine setups Number of setups 862,410 16,910 $51/setup Machining Machine hours 5,293,200 120,300 $44/hour Quality control Number of inspections 829,400 28,600 $29/inspection
The cost drivers used for each product were:

Cost Drivers

Royale

Majestic

Total

Purchase orders 16,100 22,400 38,500 Machine setups 4,310 12,600 16,910 Machine hours 74,900 45,400 120,300 Inspections 10,000 18,600 28,600

Explanation / Answer

1) Cost Drivers royale majestic purchase orders 515200 716800 machine setups 219810 642600 machining 3295600 1997600 quality control 290000 539400 total cost assigned 4320610 3896400 cost per unit 172.82 389.64 2) cost per unti Royal majestic Direct materials 620 420 Direct labor 120 100 overhead cost per unti 172.82 389.64 cost per unit 912.82 909.64 3) Gross profit Royal majestic Sales 1,480 1,320 cost per unit 912.82 909.64 Gross profit 567.18 410.36 answer

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