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.

ProcessActivityCostActivity DriverExpected QuantityCutting and WeldingWelding$776,000Welding hours4,000Machining450,000Machine hours10,000Inspecting448,250No. of inspections1,000Materials handling300,000No. of batches12,000Setups240,000No. of setups100$2,214,250AssemblyChangeover$180,000Changeover hours1,000Rework61,750Rework orders50Testing300,000No. of tests750Materials handling380,000No. of parts50,000Engineering support130,000Engineering hours2,000$1,051,750

Other overhead activities, their costs, and drivers are listed below.

ActivityCostActivity DriverQuantityPurchasing$135,000Purchase requisitions500Receiving274,000Receiving orders2,000Paying suppliers225,000No. of invoices1,000Providing space and utilities100,000Machine hours10,000Total$734,000

Other production information concerning the two hydraulic cylinders is also provided:

Cylinder ACylinder BUnits produced1,5003,000Welding hours1,6002,400Machine hours3,0007,000Inspections500500Moves7,2004,800Batches4555Changeover hours540460Rework orders545No. of tests500250Parts40,00010,000Engineering hours1,500500Requisitions42575Receiving orders1,800200Invoices650350

ProcessActivityCostCutting and WeldingWelding$2,000,000Machining1,000,000Inspecting50,000Materials handling72,000Setups400,000$3,522,000AssemblyChangeover$28,000Rework50,000Testing40,000Materials handling60,000Engineering support70,000$248,000

Other overhead activities:.

ActivityCostPurchasing$50,000Receiving70,000Paying suppliers80,000Providing space and utilities30,000$230,000

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.

AllocationWelding$Machining$Setups$

Calculate the total activity costs of all the three activities.

Cost poolsWelding$Machining$Setups$

Activity RatesWelding$per welding hourMachining$per machine hourSetups$per batch

Now assign these total costs to the products using the drivers of the three chosen activities.

Cylinder ACylinder BRate 1 (welding)$$Rate 2 (machining)$$Rate 3 (setups)$$Total overhead costs$$Unit overhead costs$$

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.

Percentage errorCylinder A%Cylinder B%