Problem 17-2A Traditional Costing Royale Majestic $640 $410 120 100 240 200 $1,0
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Problem 17-2A
Traditional Costing
Royale
Majestic
$640
$410
120
100
240
200
$1,000
$710
Activities
Cost Drivers
Estimated
Overhead
Expected Use of
Cost Drivers
Activity-Based
Overhead Rate
Cost Drivers
Royale
Majestic
Total
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Royale
Majestic
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Royale
Majestic
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Royale
Majestic
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Problem 17-2A
Schultz Electronics manufactures two large-screen television models: the Royale which sells for $1,540, and a new model, the Majestic, which sells for $1,300. The production cost computed per unit under traditional costing for each model in 2014 was as follows.Traditional Costing
Royale
Majestic
Direct materials$640
$410
Direct labor ($20 per hour)120
100
Manufacturing overhead ($40 per DLH)240
200
Total per unit cost$1,000
$710
In 2014, Schultz manufactured 25,000 units of the Royale and 10,000 units of the Majestic. The overhead rate of $40 per direct labor hour was determined by dividing total expected manufacturing overhead of $8,073,580 by the total direct labor hours (200,000) for the two models.
Under traditional costing, the gross profit on the models was Royale $540 or ($1,540 – $1,000), 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.
Activities
Cost Drivers
Estimated
Overhead
Expected Use of
Cost Drivers
Activity-Based
Overhead Rate
The cost drivers used for each product were:
Cost Drivers
Royale
Majestic
Total
Purchase orders 16,030 22,100 38,130 Machine setups 4,170 13,420 17,590 Machine hours 75,700 45,210 120,910 Inspections 10,400 17,250 27,650Warning
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Assign the total 2014 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.)Royale
Majestic
Total assigned costs $ $ Cost per unit $ $Warning
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What was the cost per unit of each model using ABC costing. (Round cost per unit to 2 decimal places, e.g. $12.25.)Royale
Majestic
Cost per unit $ $Warning
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What was the gross profit of each model using ABC costing. (Round answers to 2 decimal places, e.g. $12.25.)Royale
Majestic
Gross profit $ $Warning
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Copyright © 2000-2016 by John Wiley & Sons, Inc. or related companies. All rights reserved.Explanation / Answer
Answer 1. Allocation of Manufacturing Overhead Cost Under ABC Costing Royal Majestic Purchase Orders 545,020 751,400 Machine Setups 212,670 684,420 Machining 3,179,400 1,898,820 Quality Control 301,600 500,250 Total Manufacturing Overhead 4,238,690 3,834,890 No. of Unit produced 25,000 10,000 MOH per Unit 169.55 383.49 Answer 2. Calculation Cost per Unit Under ABC Costing Royal Majestic Direct Material 640.00 410.00 Direct Labor 120.00 100.00 MOH 169.55 383.49 Total Cost per Unit 929.55 893.49 Answer 3. Calculation of Gross Profit Under ABC Costing Royal Majestic SP per Unit 1,540.00 1,300.00 Cost per Unit 929.55 893.49 Gross Profit Per Unit 610.45 406.51 No. Of Unit Sold 25,000.00 10,000.00 Total Gross Profit 15,261,310.00 4,065,110.00