50.1K

Verified Solution

Link Copied!

1. 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 as follows:

Process	Activity	Cost	Activity Driver	Expected Quantity
Cutting and welding	Welding	$2,000,000	Welding hours	4,000
	Machining	$1,00,000	Machine hours	10,000
	Inspecting	$50,000	No. of inspections	1,000
	Materials handling	$72,000	No. Of moves	12,000
	Setups	$400,000	No. of setups	100
	Total	$3,522,000
Assembly	Changeover	$28,000	Changeover hours	1,000
	Rework	$50,000	Rework orders	50
	Testing	$40,000	No. of tests	750
	Material handling	$60,000	No. of parts	50,000
	Engineering support	$70,000	Engineering hours	2,000
	Total Cost	$248,000

2. Other overhead activities, their costs, and drivers are as follows:

Activity	Cost	Activity Driver	Expected Quantity
Purchasing	$50,000	Purchase requisitions	500
Receiving	$70,000	Receiving orders	2,000
Paying suppliers	$80,000	No. of invoices	1,000
Providing space and utilities	$30,000	Machine hours	10,000
Total Cost	$230,000

3. Other production information concerning the two hydraulic cylinders is also provided as follows:

	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
Setups	45	55
Changeover hours	540	460
Rework orders	5	45
Tests	500	250
Parts	40,000	10,000
Engineering hours	1,500	500
Requisitions	425	75
Receiving orders	1,800	200
Invoices	650	350

1. Using a plantwide rate based on machine hours, calculate the total overhead cost assigned to each product and the unit overhead cost.
2. Using activity rates, calculate the total overhead cost assigned to each product and the unit overhead cost. Comment on the accuracy of the plantwide rate.
3. Determine the percentage of total costs represented by the three most expensive activities.
4. Allocate all other activities to the three activities identified in part a. Allocate all the other activity costs to the three activities in proportion to their individual activity costs. Now assign these total costs to the products using the drivers of the three chosen activities.
5. Using the costs assigned in part a, calculate the percentage error using the ABC costs as a benchmark. Comment on the value and advantage of this ABC simplification

Answer & Explanation Solved by verified expert

See Answer