ACG4342 – Writing Project – Part 3

You are a manager at PopUp Company, who manufactures toaster ovens.  Your company produces two types of toaster ovens: basic and deluxe.  PopUp Company currently uses a traditional unit-based costing system, however, you feel strongly the company should switch to an activity-based costing system.  You believe this change would provide you more accurate costing information, which would allow for better strategic decision making.  You need to prepare a number of documents in order to convince the CFO to change the current cost management system used by your company.

Prepare a 3-page memo addressed to the CFO summarizing your findings (Please check the attached file), and why you believe the activity-based costing method gives you more useful information to make decisions for the company.  Include in the memo at least 4 ratios that you feel highlight your position that activity-based costing is more useful…

Problem

Company produces two types of toasters, basic and deluxe. For the current period, the company reports the following data:

,000 units

units

20

Engineering Modifications

Machine Hours

Batches

Engineering Support $15,900

$15,900 Engineering Modifications

7.14

Electricity

Electricity $25,000 Machine Hours

Setup Costs $33,900 Batches

.00

Basic Toaster

Machine Hours

Cost Driver Quantity

Cost Driver Quantity Activity Based Cost

Deluxe Toaster

Machine Hours

20

50

1,000

2,400

315

125

20,000

5,000
$74,800

3400
$22 per machine hour
Prime Costs $20,000

Total manufacturing cost/Number of units

Manufacturing cost per unit = $42,000
20,000

per unit

Prime Costs $30,000
Total Overhead Costs Allocated

Manufacturing cost per unit = $82,800

5,000

per unit

																																																																																																																																																			PopUp
	Basic Toaster		Deluxe Toaster
Volume			20			5,000
				Machine Hours		1,000		2,400
		Batches		315		125
		Engineering Modifications		50
		Prime Costs	$ Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper		20,000		$30,000
Market Price	$25		per unit	$60 per unit
Additional Information Follows
Costs	Driver
	Engineering Support			$15,900
		Electricity	25,000
Setup costs	33,900
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
1) Manufacturing Cost Per Unit Of Each Toaster Using The Current Unit-Based Approach	2) Manufacturing Cost Per Unit Of Each Toaster Using An Activity-Based Costing Approach:
Total Overhead Costs	Activities	Cost Pool	Cost Driver			Cost Driver Quantity	Cost Driver Rate
Engineerong Support	70		$22	per engineering modification
	$25,000	3,400	$7.35		per machine hour
	Setup Costs		$33,900	440	$77.05	per batch
	$74,800
Item Cost	Basic Toaster Cost	Deluxe Toaster Cost
Total Machine Hours For Both Types Of Toasters
A. Prime Cost		$20,000	$30,000.00
1000	B. Manufacturing Overhead		Activity Based Cost
2400	Engineering Support ($227.14 per engineering modification)	$4,542.86	$11,357.14
	3400	Electricity ($7.35 per machine hour)	$7,352.94	$17,647.06
Setup Costs ($77.05 per batch)	$24,269.32	$9,630.68
Overhead Absorption Rate Per Machine Hour	Total Manufacturing Overhead	$36,165.12	$38,634.88
C. Total Manufacturing Cost (A+B)	$56,165.12	$68,634.88
Total overhead costs/Total machine hours for both types of toasters	D. Total Number Of Units Produced
E. Manufacturing Cost Per Unit (C/D)	$2.81	$13.73
Manufacturing Cost Per Unit For Basic Toaster
Total manufacturing cost of Basic Toaster:
	Total Overhead Costs Allocated	(1000 x $22)	$22,000
	$42,000
		Manufacturing cost per unit =
$2.10
Manufacturing Cost Per Unit For Deluxe Toaster
Total manufacturing cost of Deluxe Toaster:
(2,400 x $22)	$52,800
	$82,800
Manufacturing cost per unit = Total manufacturing cost/Number of units
$16.56