Homework SourseApproximately Relevant ABC Reducir Inc produces two differen
Approximately Relevant ABC
Reducir, Inc., produces two different types of hydraulic cylinders. Reducir produces a major subassembly for the cylinders in the Cutting and Welding Department. Other parts and the subassembly are then assembled in the Assembly Department. The activities, expected costs, and drivers associated with these two manufacturing processes are given below.
Other overhead activities, their costs, and drivers are listed below.
Other production information concerning the two hydraulic cylinders is also provided:
Other overhead activities:.
The per unit overhead cost using the 14 activity-based drivers is $1,108 and $779 for Cylinder A and Cylinder B, respectively.
Required:
1. Determine the percentage of total costs represented by the three most expensive activities.
%
2. If required, round your interim calculations and final answers to the nearest dollar.
Allocate the costs of all other activities to the three activities identified in Requirement 1 in proportion to their individual activity costs.
Calculate the total activity costs of all the three activities.
Now assign these total costs to the products using the drivers of the three chosen activities.
3. Using the costs assigned in Requirement 2, calculate the percentage error using the ABC costs as a benchmark. Round your answers to one decimal place. If an item is negative, use a minus (-) sign to indicate.
| Process | Activity | Cost | Activity Driver | Expected Quantity |
| Cutting and Welding | Welding | $ 776,000 | Welding hours | 4,000 |
| Machining | 450,000 | Machine hours | 10,000 | |
| Inspecting | 448,250 | No. of inspections | 1,000 | |
| Materials handling | 300,000 | No. of batches | 12,000 | |
| Setups | 240,000 | No. of setups | 100 | |
| $2,214,250 | ||||
| Assembly | Changeover | $ 180,000 | Changeover hours | 1,000 |
| Rework | 61,750 | Rework orders | 50 | |
| Testing | 300,000 | No. of tests | 750 | |
| Materials handling | 380,000 | No. of parts | 50,000 | |
| Engineering support | 130,000 | Engineering hours | 2,000 | |
| $1,051,750 |
Solution
1. Activities highlighted in bold in last column are most expensive.
2. Allocation of other activity costs:
Total Activity Costs:
Activity rates:
Total Costs to products:
3. Percentage error using ABC costs as benchmark:
To calculate %age error, we need to allocate expected costs of ABC into Cylinder A and B as we did in req 2:
Percent error:
| Activity | Cost | Expected Quantity | Cylinder A Units | Cylinder B Units | Cylinder A Cost | Cylinder B Cost | %age of total cost |
| Welding | 2,000,000 | 4,000 | 1,600 | 2,400 | 800,000 | 1,200,000 | 50.00% |
| Machining | 1,000,000 | 10,000 | 3,000 | 7,000 | 300,000 | 700,000 | 25.00% |
| Inspecting | 50,000 | 1,000 | 500 | 500 | 25,000 | 25,000 | 1.25% |
| Materials handling | 72,000 | 12,000 | 7,200 | 4,800 | 43,200 | 28,800 | 1.80% |
| Setups | 400,000 | 100 | 45 | 55 | 180,000 | 220,000 | 10.00% |
| 3,522,000 | 1,348,200 | 2,173,800 | |||||
| Changeover | 28,000 | 1,000 | 540 | 460 | 15,120 | 12,880 | 0.70% |
| Rework | 50,000 | 50 | 5 | 45 | 5,000 | 45,000 | 1.25% |
| Testing | 40,000 | 750 | 500 | 250 | 26,667 | 13,333 | 1.00% |
| Materials handling | 60,000 | 50,000 | 40,000 | 10,000 | 48,000 | 12,000 | 1.50% |
| Engineering support | 70,000 | 2,000 | 1,500 | 500 | 52,500 | 17,500 | 1.75% |
| 248,000 | 147,287 | 100,713 | |||||
| Purchasing | 50,000 | 500 | 425 | 75 | 42,500 | 7,500 | 1.25% |
| Receiving | 70,000 | 2,000 | 1,800 | 200 | 63,000 | 7,000 | 1.75% |
| Paying suppliers | 80,000 | 1,000 | 650 | 350 | 52,000 | 28,000 | 2.00% |
| Providing space and utilities | 30,000 | 10,000 | 3,000 | 7,000 | 9,000 | 21,000 | 0.75% |
| 230,000 | 166,500 | 63,500 | |||||
| 4,000,000 | 1,661,987 | 2,338,013 | 100.00% |
