Problem - Schultz Electronics manufactures two large-screen television models: the Royale which sells for $1,596, and a new model, the Majestic, which sells for $1,295. The production cost computed per unit under traditional costing for each model in 2014 was as follows.
|
Traditional Costing
|
Royale
|
Majestic
|
|
Direct materials
|
$680
|
$400
|
|
Direct labor ($20 per hour)
|
120
|
100
|
|
Manufacturing overhead ($41 per DLH)
|
246
|
205
|
|
Total per unit cost
|
$1,046
|
$705
|
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 $8,280,690 by the total direct labor hours (200,000) for the two models.
Under traditional costing, the gross profit on the models was Royale $550 or ($1,596 - $1,046), and Majestic $590 or ($1,295 - $705). 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
|
$1,388,800
|
39,680
|
$35/order
|
|
Machine setups
|
Number of setups
|
1,018,130
|
19,210
|
53/setup
|
|
Machining
|
Machine hours
|
5,116,140
|
118,980
|
43/hour
|
|
Quality control
|
Number of inspections
|
757,620
|
28,060
|
27/inspection
|
The cost drivers used for each product were:
|
Cost Drivers
|
Royale
|
Majestic
|
Total
|
|
Purchase orders
|
16,530
|
23,150
|
39,680
|
|
Machine setups
|
5,330
|
13,880
|
19,210
|
|
Machine hours
|
74,450
|
44,530
|
118,980
|
|
Inspections
|
11,100
|
16,960
|
28,060
|
Required -
Assign the total 2014 manufacturing overhead costs to the two products using activity-based costing (ABC) and determine the overhead cost per unit.
What was the cost per unit of each model using ABC costing.
What was the gross profit of each model using ABC costing.