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
