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	%