Schultz Electronics manufactures two large-screen television models: the Royale which sells for$1,600 and a new model, the Majestic

P4-2A Schultz Electronics manufactures two large-screen television models: the Royale which sells for$1,600 and a new model, the Majestic, which sells for$1,300 The production cost computed per unit under traditional costing for each model is 2014 was as follows.

Traditional Costing	Royale	Majestic
Direct materials	$700	$420
Direct labor ($20 per hour)	120	100
Mfg overhead ($38 per DLH)	228	190
Total per unit cost	$1,048	$710

In 2014, Schultz manufactured25,000 units of the Royale and10,000 units of the Majestic. The overhead rate of $38 per direct labor hour was determined by dividing total expected manufacturing overhead of $7,600,000 by the direct labor hours 200,000 for the two models

 

Under traditional costing, the gross profit on the models was: Royale $552 or ($1,600 - $1,048) and Majestic $590 or ($1,300 - $710)  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.

Activity	Cost Driver	Estimated Overhead	Expected Use of Cost Drivers	Activity- Based Overhead Rate
Purchasing	Number of orders	$1,200,000	40,000	$30	per order
Machine setups	Number of setups	900,000	18,000	50	per setup
Machining	Machine hours	4,800,000	120,000	40	per hour
Quality control	Number of inspections	700,000	28,000	25	per inspection

The cost drivers used for each product were:

Cost Driver	Royale	Majestic	Total
Purchase orders	17,000	23,000	40,000
Machine setups	5,000	13,000	18,000
Machine hours	75,000	45,000	120,000
Inspections	11,000	17,000	28,000

Instructions

a. Assign the total 2014 manufacturing overhead costs to the two products using activity-based costing (ABC).

b What was the cost per unit and gross profit of each model using ABC costing?

c Are management's future plans for the two models sound? Enter your answer in the block below.

 

TUTORIAL PREVIEW

a. Assign the total 2014 manufacturing overhead costs to the two products using activity-based costing (ABC).

		Royale		Majestic
Overhead Rate	Rate	Drivers Used	Cost Assigned	Drivers Used	Cost Assigned	Total Overhead
Purchase orders	$30	17,000	$510,000	23,000	$690,000	$1,200,000
Machine setups	$50	5,000	$250,000	13,000	$650,000	$900,000
Machine hours	$40	75,000	$3,000,000	45,000	$1,800,000	$4,800,000

 

File name: P4-2A Schultz.xls  File type: xls  PRICE: $7

FireOut, Inc. manufactures steel cylinders and nozzles for two models of fire extinguishers: (1) a home fire extinguisher and (2) a commercial fire extinguisher.

P4-1A FireOut, Inc. manufactures steel cylinders and nozzles for two models of fire extinguishers: (1) a home fire extinguisher and (2) a commercial fire extinguisher. The home model is a high-volume (54,000 units), half-gallon cylinder that holds 2 1/2 pounds of multi-purpose dry chemical at 480 PSI. The commercial model is a low-volume (10,200 units), 2-gallon cylinder that holds10 pounds of multi-purpose dry chemical at 390 PSI. Both products require 1.5 hours of direct labor for completion. Therefore, total annual direct labor hours are 96,300 or [1.5 hrs × (54,000 + 10,200)]. Expected annual manufacturing overhead is $1,557,480. Thus, the predetermined overhead rate is $16.17 or ($1,557,480 / 96,300) per direct labor hour. The direct materials cost per unit is $18.50 for the home model and $26.50 for the commercial model. The direct labor cost is $19.00 per unit for both the home and the commercial models.

 

The company's managers identified six activity cost pools and related cost drivers and accumulated overhead by cost pool as follows.

Activity Cost Pool	Cost Driver	Estimated Overhead	Expected Use of Cost Drivers	Expected Use of Drivers by Product
				Home		Commercial
Receiving	Pounds	$70,350	335,000	215,000		120,000
Forming	Machine hours	150,500	35,000	27,000		8,000
Assembling	Number of parts	412,300	217,000	165,000		52,000
Testing	Number of tests	51,000	25,500	15,500		10,000
Painting	Gallons	52,580	5,258	3,680		1,578
Packing and shipping	Pounds	820,750	335,000	215,000		120,000
		$1,557,480

 

Instructions

a. Under traditional product costing, compute the total unit cost of both products. Prepare a single comparative schedule of the individual costs by products, in the format provided below.

b. Under ABC, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver).
c Prepare a schedule assigning each activity's overhead cost pool to each product based on the use of cost drivers. (Include a computation of overhead cost per unit, rounding to the nearest cent.)

TUTORIAL PREVIEW

a. Under traditional product costing, compute the total unit cost of both products. Prepare a single comparative schedule of the individual costs by products, in the format provided below.

	Products
Manufacturing Costs	Home Model	Commercial Model
Direct materials	$18.50	$26.50
Direct labor	$19.00	$19.00
Overhead	$24.26	$24.26

File name: P4-1A FireOut.xls  File type: xls  PRICE: $8