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 $650 $420
Direct labor ($20 per hour) 120 100
Manufacturing overhead ($42 per DLH) 252 210
Total per unit cost $1,022 $730

In 2017, Schultz manufactured 25,000 units of the Royale and 10,000 units of the Majestic. The overhead rate of $42 per direct labor hour was determined by dividing the total expected manufacturing overhead of $8,449,220 by the total direct labor hours (200,000) for the two models. Under traditional costing, the gross profit on the models was Royale $458 ($1,480 - $1,022) 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, 2017.


Activity Cost Pools Cost Drivers Estimated Overhead Expected Use of Cost Drivers Activity-Based Overhead Rate
Purchasing Number of orders $1,261,700 40,700 $31/order
Machine setups Number of setups 874,120 16,810 $52/setup
Machining Machine hours 5,440,500 120,900 $45/hour
Quality control Number of inspections 872,900 30,100 $29/inspection

The cost drivers used for each product were:

Cost Drivers Royale Majestic Total
Purchase orders 17,600 23,100 40,700
Machine setups 14,510 2,300 16,810
Machine hours 75,300 45,600 120,900
Inspections 11,900 18,200 30,100
Assign the total 2017 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.)

Required:
Calculate cost per unit of each model using ABC costing.

Answer 1

Answer:

Schultz Electronics

                                  Royale      Majestic

Cost per unit cost   $971.35    $841.55

Explanation:

a) Data and Calculations:

Information about overhead for the year ended December 31, 2017.

Activity Cost  Cost Drivers      Estimated       Expected Use   Activity-Based

  Pools                                      Overhead    of Cost Drivers     O/H Rate

Purchasing    No. of orders   $1,261,700            40,700             $31/order

Machine        

setups          No. of setups       874,120              16,810             $52/setup

Machining    Machine hours 5,440,500          120,900             $45/hour

Quality          Number of

control           inspections       872,900            30,100         $29/inspection

Total overhead costs         $8,449,220

The cost drivers used for each product were:

Cost Drivers         Royale         Majestic      Total

Purchase orders  17,600          23,100      40,700

Machine setups    14,510          2,300        16,810

Machine hours    75,300        45,600    120,900

Inspections           11,900         18,200      30,100

Allocation of overhead costs:

Cost Drivers               Royale                         Majestic                    Total

Purchasing     $545,600 (17,600*$31)     $716,100 (23,100 *$31) $1,261,700

Machine setup 754,520 (14,510*$52)       119,600 (2,300*$52)       874,120

Machining     3,388,500 (75,300*$45) 2,052,000 (45,600*$45) 5,440,500

Quality Control 345,100 (11,900*$29)      527,800 (18,200*$29)    872,900

Total            $5,033,720                       $3,415,500                     $8,449,220

Quantity           25,000                              10,000

Overhead per

  unit            $201.35                               $341.55

Cost per unit of each model, using ABC Costing Technique:

                                             Royale       Majestic  

Direct materials                    $650        $420

Direct labor ($20 per hour)    120           100

Manufacturing overhead       201.35      341.55

($42 per DLH)

Total per unit cost               $971.35    $841.55