Problem PopUp Company produces two types of toasters, basic ✓ Solved

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Problem PopUp Company produces two types of toasters, basic and deluxe. For the current period, the company reports the following data: Basic Toaster Deluxe Toaster Volume 20,000 units 5,000 units Machine Hours 1,400 Batches Engineering Modifications Prime Costs $20,000 $30,000 Market Price $25 per unit $60 per unit Additional Information Follows Costs Driver Engineering Support $15,900 Engineering Modifications Electricity 25,000 Machine Hours Setup costs 33,900 Batches 1) Compute the manufacturing cost per unit of each toaster using the current unit-based approach. Under this system costs are assigned to the toasters on the basis of machine hours. 2) Compute the manufacturing cost per unit of each toaster using an activity-based costing approach.

Paper For Above Instructions

The Problem PopUp Company has two types of toasters: basic and deluxe. The analysis of manufacturing costs is vital for understanding profitability and operational efficiency. In this paper, we will compute the manufacturing costs per unit for each type of toaster using both a traditional unit-based approach and an activity-based costing (ABC) approach.

1. Current Unit-Based Approach

In the unit-based costing approach, costs are assigned based on machine hours. The provided data indicates a total of 20,000 basic toasters and 5,000 deluxe toasters produced during the current period. The key costs related to production are summarized as follows:

  • Prime Costs for Basic Toaster: $20,000

  • Prime Costs for Deluxe Toaster: $30,000

  • Machine Hours for Basic Toaster: 1,400 hours

  • Machine Hours for Deluxe Toaster: 1,400 hours

To calculate the manufacturing cost per unit for each toaster, we first need to determine the total machine hours allocated to each:

  • Basic Toaster: 1,400 hours / 20,000 units = 0.07 machine hours per unit

  • Deluxe Toaster: 1,400 hours / 5,000 units = 0.28 machine hours per unit

Now, we can calculate the unit costs:

Manufacturing cost per unit for Basic Toaster:

Cost Per Unit = Total Prime Cost / Total Units Produced

Cost Per Unit = $20,000 / 20,000 = $1.00

Manufacturing cost per unit for Deluxe Toaster:

Cost Per Unit = Total Prime Cost / Total Units Produced

Cost Per Unit = $30,000 / 5,000 = $6.00

2. Activity-Based Costing Approach

The ABC approach allocates manufacturing overhead based on actual activities involved in production. The additional data for ABC includes:

  • Engineering Support Costs: $15,900

  • Electricity Costs: $25,000

  • Setup Costs: $33,900

  • Total Machine Hours: To be determined

We need to identify activities and their cost drivers to allocate the costs properly. For this example:

  • Engineering Support is directly related to the modifications made for the toasters.

  • Electricity is based on machine hours used, which has been given directly.

  • Setup costs are allocated based on the number of batches, which is assumed to be related to both types of toasters.

Assuming 20 batches for basic toasters and 5 for deluxe, we can break down the costs as follows:

Total setup costs: $33,900; allocated per batch:

Cost Per Batch = Total Setup Costs / Total Batches

Cost Basic Toaster = $33,900 / 25 = $1,356

Now to compute costs:

Cost per Basic Toaster: $1,00 (prime) + ($15,900 / 20,000) + ($25,000 / 1,400) + ($1,356 / 20) = $1.00 + $0.795 + $17.86 + $67.8 = $86.45

Cost per Deluxe Toaster: $6.00 (prime) + ($15,900 / 5,000) + ($25,000 / 1,400) + ($1,356 / 5) = $6.00 + $3.18 + $17.86 + $271.2 = $274.24

Conclusion

Through the traditional unit-based approach, we found the manufacturing cost per unit is $1.00 for basic toasters and $6.00 for deluxe toasters. Contrarily, the ABC approach yielded costs of $86.45 and $274.24 respectively. This stark difference in cost analysis signifies the importance of adopting activity-based costing in modern manufacturing environments for benefit present management decisions and boosting accuracy in pricing products for the competitive market.

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