Determine the cost of the receiving activity

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Reference no: EM13949519

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.

Reference no: EM13949519

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