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. 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 Other overhead activities, their costs, and drivers are listed below. Activity Cost Activity Driver Quantity Purchasing $ 135,000 Purchase requisitions 500 Receiving 274,000 Receiving orders 2,000 Paying suppliers 225,000 No. of invoices 1,000 Providing space and utilities 100,000 Machine hours 10,000 Total $ 734,000 Other production information concerning the two hydraulic cylinders is also provided: Cylinder A Cylinder B Units produced 1,500 3,000 Welding hours 1,600 2,400 Machine hours 3,000 7,000 Inspections 500 500 Moves 7,200 4,800 Batches 45 55 Changeover hours 540 460 Rework orders 5 45 No. of tests 500 250 Parts 40,000 10,000 Engineering hours 1,500 500 Requisitions 425 75 Receiving orders 1,800 200 Invoices 650 350 Process Activity Cost Cutting and Welding Welding $ 2,000,000 Machining 1,000,000 Inspecting 50,000 Materials handling 72,000 Setups 400,000 $3,522,000 Assembly Changeover $ 28,000 Rework 50,000 Testing 40,000 Materials handling 60,000 Engineering support 70,000 $248,000 Other overhead activities:. Activity Cost Purchasing $ 50,000 Receiving 70,000 Paying suppliers 80,000 Providing space and utilities 30,000 $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.

	Allocation
Welding	$
Machining	$
Setups	$

Calculate the total activity costs of all the three activities.

	Cost pools
Welding	$
Machining	$
Setups	$

	Activity Rates
Welding	$	per welding hour
Machining	$	per machine hour
Setups	$	per batch

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

	Cylinder A		Cylinder B
Rate 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 error
Cylinder A	%
Cylinder B	%

Feedback

1. Percentage of total activity costs = Total of three activities Total activity costs

2. Allocation = (individual expensive activity) Total expensive activities x Total not expensive activities. Review how to setup cost pools, activity rates, overhead assignment, and overhead per unit.

3. Percentage error = (Total approx. ABC cost Activity cost assignment) Activity cost assignment. Discuss desirability.