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Prepare a 2-3 page memo addressed to the CFO summarizing your findings, 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.

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 activity-based costing approach
ANSERS:
Answer 1.
Predetermined Overhead rate = $74,800 (Total overhead) / 3,400 Mach Hrs
Predetermined Overhead rate = $22 per machine hour
Calculation of Cost per Unit
Under Unit Based Approach
	Basic Toaster	Deluxe Toaster
Prime Costs	20,000	30,000
Overhead	22,000	52,800
Total Manufacturing Costs	42,000	82,800
No. of Units	20,000	5,000
Cost per Unit	2.10	16.56
Answer 2.
Activity Cost Pool	Estimated Overhead	Expected use of Cost Drivers	Activity-Based Overhead rate
Engineering Supports	15,900	70	227.14
Electricity	25,000	3,400	7.35
Setup Costs	33,900	440	77.05
Allocation of Overhead Cost
Under ABC
Particulars	Basic Toaster	Deluxe Toaster	Total
Engineering Supports	4,543	11,357	15,900
Electricity	7,353	17,647	25,000
Setup Costs	24,269	9,631	33,900
Overhead Cost per Unit	36,165	38,635
Calculation of Total Cost
Under ABC
	Model
	Home	Commercial
Prime Cost	20,000	30,000
Overhead Cost	36,165	38,635
Total Unit Cost	56,165	68,635
No. of Units	20,000	5,000
Cost per Unit	2.81	13.73
Income statement	Units based approach	ABC method
	Sales revenue
	Basic toaster (20000*25)	500000	500000
	Delux Toaster (5000*60)	300000	300000
	Total revenue	800000	800000
	Cost of goods sold
	Basic toaster	20000	20000
	Delux Toaster	30000	30000
	Total cost	50000	50000
	Gross profit	750000	750000
	Overhead cost
	Basic toaster	22000	36165
	Delux toaster	52800	38635
	Total cost	74800	74800
	Net operating income	675200	675200

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