Question

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	1,000		2,400
Batches	315		125
Engineering Modifications	20		50
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 activy-based costing approach

Answer 1

1) Total amount of overhead = combined costs of engineering support, electricity and setup costs.

Total overhead = $15,900 + $25,000 + $33,900

Total overhead = $74,800

Total no. of machine hours = Machine hours used by Basic Toaster + Machine hours used by Deluxe Toaster

Total no. of machine hours = 1,000 machine hours + 2,400 machine hours.

Total no. of machine hours = 3,400 machine hours.

Overhead absorption rate per machine hour = ( $ 74,800 ) / (3,400 hours)

Overhead absorption rate per machine hour = $22 per machine hour.

Manufacturing cost per unit of each toaster using the current unit-based approach is as follows:

Therefore, manufacturing cost per unit of each Basic toaster is $2.10

Therefore, manufacturing cost per unit of Deluxe toaster is $16.56

2. Manufacturing cost per unit of each toaster using an activity-based costing approach:

Calculation of Cost Driver rates are as follows:

From the above, it is clear that,

company incurs $227.14 per engineering modification;

company incurs $7.35 per machine hour;

company incurs $77.05 per batch.

The following table shows the manufacturing cost per unit under activity based costing:

For accuracy, the activity driver rate is taken by actually multiplying the cost driver of individual toasters with Respective cost pool and dividing it by the total cost driver quantity. As if the decimal values are eliminated, the costs won't be accurate.

Hope it is helpful!!