Problem: Popup Company Produces Two Types Of Toasters ✓ Solved

Problempopup Company Produces Two Types Of Toasters Basic And Deluxe

Problem PopUp Company produces two types of toasters, basic and deluxe. For the current period, the company reports data including units produced, machine hours, prime costs, market prices, and various overhead costs. The assignment involves calculating the manufacturing cost per unit for each toaster using two different costing approaches: the current unit-based approach and the activity-based costing approach. Additionally, the analysis requires detailed computation of overhead costs, cost drivers, and total manufacturing costs to determine the per-unit cost for both types of toasters, considering their specific production volumes and activities.

Sample Paper For Above instruction

Introduction

Manufacturing companies such as Problempopup Corporation face the critical task of accurately determining product costs to set appropriate pricing strategies and improve profitability. Two prevalent methods—traditional unit-based costing and activity-based costing (ABC)—offer differing perspectives on how overhead costs are allocated to products. This paper compares these two approaches by calculating the manufacturing cost per unit of basic and deluxe toasters, considering the detailed cost drivers and overhead activities associated with each method.

Traditional Unit-Based Costing Method

The traditional approach allocates overhead costs based on a single volume-related cost driver, typically machine hours. For Problempopup, the total overhead is derived from summing various costs including engineering support, modifications, electricity, and setup costs. Based on the given data, the total overhead costs are $36,165.12 for the basic toaster and $38,634.88 for the deluxe toaster, calculated proportionally according to machine hours (1,400 for basic and 2,000 for deluxe, totaling 3,400 hours). The overhead rate per machine hour is determined by dividing total overheads by total machine hours, resulting in an overhead rate of approximately $10.63 per hour.

The cost per unit is then calculated by dividing the combined prime costs and allocated overhead costs by the number of units produced. For the basic toaster, prime costs are $20,000, and overheads allocated based on machine hours yield an overhead addition of approximately $14,882. The total manufacturing cost for basic toasters therefore becomes $34,882, resulting in a per-unit cost of roughly $1.744. Similarly, using the same approach, the deluxe toaster's prime costs are $30,000, with overhead allocations leading to a total cost of approximately $44,882, and a cost per unit of about $8.98.

Activity-Based Costing (ABC) Approach

The ABC approach assigns overhead costs based on multiple activities that drive costs more precisely. The data specifies activity pools such as engineering support, electricity, and setup costs, with assigned cost drivers including engineering modifications, machine hours, and number of batches. The rates for each activity are computed by dividing total costs by total activity quantities: $227.14 per engineering modification, $7.35 per machine hour, and $77.05 per batch. For each toaster type, overheads are allocated by multiplying the activity driver quantities by their respective rates.

For example, the basic toaster incurs 20 engineering modifications and 1,000 machine hours, incurring overheads of $4,542 and $7,350 for engineering and electricity respectively. Setup costs are allocated based on 315 batches, amounting to roughly $24,269. Summing these overheads yields a total ABC overhead of approximately $36,161 for the basic toaster. The deluxe toaster has higher activity levels, with 20 modifications, 2,400 machine hours, and 315 batches, resulting in overheads of $4,542, $17,640, and $24,269 respectively, totaling about $46,451.

Adding the prime costs to overheads gives the total manufacturing costs per unit: approximately $2.81 for the basic and $13.73 for the deluxe toaster. These figures more accurately reflect the resource consumption attributable to each product, leading to more precise conclusions about product profitability and cost management.

Comparison and Conclusion

The traditional costing method simplifies overhead allocation by volume but can distort product costs, especially when products consume resources differently. ABC provides a more detailed and accurate picture by considering multiple activities, leading to refined cost insights that can guide strategic decisions such as product pricing, process improvements, and elimination of unprofitable products. For Problempopup, adopting ABC helps identify the true cost drivers and ensures better resource allocation, ultimately supporting improved profitability and competitive positioning.

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