Milan Machining Company has identified the following overhead activities, costs, and activity drivers for the coming year:
| Activity |
Expected Cost |
Activity Driver |
Activity Capacity |
|
Setup
|
$60,000
|
Number of setups
|
300
|
|
Inspecting
|
20,000
|
Inspection hours
|
2,000
|
|
Grinding
|
90,000
|
Machine hours
|
18,000
|
|
Receiving
|
?
|
Number of parts
|
60,000
|
The company produces two different machine subassemblies used by other manu- facturers. Expected annual data for the two subassemblies follow:
| |
Subassembly A |
Subassembly B
|
|
Direct materials
|
$340,000
|
$380,000
|
|
Direct labor
|
$240,000
|
$240,000
|
|
Units completed
|
40,000
|
50,000
|
|
Number of setups
|
150
|
150
|
|
Inspection hours
|
1,500
|
500
|
|
Machine hours
|
7,200
|
10,800
|
|
Parts used
|
20,000
|
40,000
|
Upon investigation, you discover that the Receiving Department employs one worker who spends 40 percent of his time on the receiving activity and 25 percent of his time on inspecting products. His salary is $50,000. Receiving also uses a forklift, at a cost of $10,000 per year for depreciation and fuel. The forklift is used only in receiving.
Required
1. Determine the cost of the Receiving activity
2. Assign the overhead costs to each product using ABC.
3. Now approximate the ABC assignments using the two most expensive activities to form cost pools (the cost of the less expensive activities are allocated to the expensive activities in proportion to their original cost).
4. What is the percentage error from using the approximation in Requirement 3 (for each product)? Explain why this simplification may be a good approach to use.