Cornerstones of Cost Management 2nd Edition by Don Hansen ,Maryanne Mowen

Exercise 47

Activity-Based Costing, Reducing the Number of Drivers and Equal Accuracy
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 given below.

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 listed below.

Other production information concerning the two hydraulic cylinders is also provided:

Required:
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. Calculate the global consumption ratios.
4. Calculate the consumption ratios for welding and materials handling (Assembly) and show that two drivers, welding hours and number of parts, can be used to achieve the same ABC product costs calculated in Requirement 2. Explain the value of this simplification.
5. Calculate the consumption ratios for inspection and engineering, and show that the drivers for these two activities also duplicate the ABC product costs calculated in Requirement 2.