Reference no: EM13949389

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.