Airepart, Inc., produces two different types of subassemblies for the aircraft industry. Airepart produces a major component for the subassemblies in the cutting and welding department. Other parts and the manufactured component are then assembled in the assembly department. The activities, expected costs, and drivers associ- ated with these two manufacturing processes are as follows:
|
Process
|
Activity
|
Cost
|
Activity Driver
|
Expected Quantity
|
|
Cutting and
|
Welding
|
$ 2,000,000
|
Welding hours
|
4,000
|
|
Welding
|
Machining
|
1,000,000
|
Machine hours
|
10,000
|
|
|
Inspecting
Materials handling
|
70,000
52,000
|
No. of inspections
No. of moves
|
1,000
12,000
|
|
|
Setups
|
400,000
|
No. of batches
|
100
|
|
|
|
$3,522,000
|
|
|
|
Assembly
|
Changeover
|
$ 28,000
|
Changeover hours
|
1,000
|
|
|
Rework
|
50,000
|
Rework orders
|
50
|
|
|
Testing
|
40,000
|
No. of tests
|
750
|
|
|
Materials
handling Engineering support
|
60,000
70,000
|
No. of parts
Engineering hours
|
50,000
2,000
|
|
|
|
$ 248,000
|
|
|
Note: In the assembly process, the materials handling activity is a function of product characteristics rather than batch activity.
Other overhead activities, their costs, and drivers are as follows:
| Activity |
Cost |
Activity Driver |
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
|
|
|
$230,000
|
|
|
Other production information concerning the two subassemblies is also provided as follows:
| |
Subassembly A |
Subassembly 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
|
|
Tests
|
500
|
250
|
|
Parts
|
40,000
|
10,000
|
|
Engineering hours
|
1,500
|
500
|
|
Requisitions
|
425
|
75
|
|
Receiving orders
|
1,800
|
200
|
|
Invoices
|
650
|
350
|
The per-unit overhead costs using the 14 activity-based drivers are $1,108 and $779 for Subassemblies A and B, respectively.
Required
1. Determine the percentage of total costs represented by the three most expensive activities.
2. Allocate the costs of all other activities to the three activities identified in Requirement 1. Allocate 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.
3. Using the costs assigned in Requirement 1, calculate the percentage error using the ABC costs as a benchmark. Comment on the value and advantages of this ABC simplification.