Assign overhead to products using ABC and evaluate decision

Assign overhead to products using ABC and evaluate decision. A Schultz Electronics manufactures two ultra high-definition television models: the Rovale which sells for $1,600, and a new model, the Majestic, which sells for $1,300. The pro- duction cost computed per unit under traditional costing for each model in 2017 was as follows (LO 2), AP Traditional Costing Royale Majestic Direct labor ($20 per hour) Manufacturing overhead ($38 per DLH) Total per unit cost 700 120 228 $1,048 $420 190 $710 XLS In 2017, Schultz manufactured 25,000 units of the Royale and 10,000 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 total direct labor hours (200,000) for the two models Under traditional costing, the gross profit on the models was Royale $552 ($1,600- $1,048) and Majestic $590 ($1,300 $710). Because of this difference, management is con- sidering 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 in- formation about overhead for the year ended December 31, 2017. Activity- Based Overhead Rate $30/order $50/setup $40/hour Expected Activity Estimated Use of Overhead Cost Drivers Cost Pools Cost Drivers Machine setups Machining Quality control Number of inspections 700,000 28,000 $25/inspection Number of orders Number of setups Machine hours $1,200,000 900,000 18,000 4,800,000120,000

Solution

Answer:

(a) Assign the total 2017 manufacturing overhead costs to the two products using activity-based costing (ABC). and overhead cost per unit

Royale

Majestic

Overhead Rate

Rate

Drivers
Used

Cost
Assigned

Drivers
Used

Cost
Assigned

Total
Overhead

Purchasing

$30

17,000

$510,000

23,000

$690,000

$34

Machine setups

$50

5,000

$250,000

13,000

$650,000

$26

Machining

$40

75,000

$3,000,000

45,000

$1,800,000

$137

Quality control

$25

11,000

$275,000

17,000

$425,000

$20

Total assigned costs

$4,035,000

$3,565,000

$217

Units produced

25,000

10,000

Cost per unit

$161.40

$356.50

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2

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

Royale

Majestic

Direct Materials

$700.00

$420.00

Direct Labor

$120.00

$100.00

Overhead

$161.40

$356.50

Total cost per unit

$981.40

$876.50

Revenue

$1,600.00

$1,300.00

Expenses

981.40

876.50

Profit

$618.60

$423.50

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(c) Are management\'s future plans for the two models sound?.

When looking at the ABC costing of the two models the actual costs of manufacturing the Royale Model are less than the traditional amounts, showing a greater profit margin than anticipated.So I would suggest against a higher production of the Majestic Model and increase the production of the Royale Model as it will bring in a greater profit.

			Royale	Majestic
Overhead Rate	Rate	Drivers Used	Cost Assigned	Drivers Used	Cost Assigned	Total Overhead
Purchasing	$30	17,000	$510,000	23,000	$690,000	$34
Machine setups	$50	5,000	$250,000	13,000	$650,000	$26
Machining	$40	75,000	$3,000,000	45,000	$1,800,000	$137
Quality control	$25	11,000	$275,000	17,000	$425,000	$20
Total assigned costs		$4,035,000		$3,565,000	$217
Units produced	25,000	10,000
Cost per unit	$161.40	$356.50