Question

custom products. VE 2 Exercise 4.22 Approximately Relevant ABC Silven Company has identified the following overhead activities, costs, and activity drivers for the coming year: Activity Expected Cost Activity Driver Activity Capacity Setting up equipment S126,000 Number of setups 150 Ordering materials 18,000 Number of orders 900 Machining 126,000 Machine hours Receiving 30,000 Receiving hours 1,250 10.500 Silven produces two models of cell phones with the following expected activity demands: Model X 5,000 Model Y 10,000 100 Units completed Number of setups Number of orders Machine hours 300 6,000 4.500 on Chapter 4 Activity-Based Costing Required: 1. Determine the total overhead assigned to each product using the four activity drivers. 2. Determine the total overhead assigned to each model using the two most expensive activi- ties. The costs of the two relatively inexpensive activities are allocated to the two expensive activities in proportion to their costs. 3. Using ABC as the benchmark, calculate the percentage error and comment on the accuracy of the reduced system. Explain why this approach may be desirable.

Answer 1

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Silven Company
	A	B	C=A/B	D	E=D*C	F	G=F*C	H=D+F	I=E+G
Answer 1	Allocation of cost by fully specified ABC			Model X		Model Y		Total
Activity	Cost	Capacity	Cost per driver	Capacity used	Cost	Capacity used	Cost	Capacity used	Cost
Setting up environment	126,000.00	150.00	840.00	100.00	84,000.00	50.00	42,000.00	150.00	126,000.00
Ordering Materials	18,000.00	900.00	20.00	300.00	6,000.00	600.00	12,000.00	900.00	18,000.00
Machining	126,000.00	10,500.00	12.00	6,000.00	72,000.00	4,500.00	54,000.00	10,500.00	126,000.00
Receiving	30,000.00	1,250.00	24.00	375.00	9,000.00	875.00	21,000.00	1,250.00	30,000.00
Total Activity Cost	300,000.00				171,000.00		129,000.00		300,000.00
Answer 2	A	B	C=A/B	D	E=D*C	F	G=F*C	H=D+F	I=E+G
Two most expensive activities are:				Model X		Model Y		Total
Activity	Cost	Capacity	Cost per driver	Capacity used	Cost	Capacity used	Cost	Capacity used	Cost
Setting up environment	126,000.00	150.00	840.00	100.00	84,000.00	50.00	42,000.00	150.00	126,000.00
Machining	126,000.00	10,500.00	12.00	6,000.00	72,000.00	4,500.00	54,000.00	10,500.00	126,000.00
Activity Cost	252,000.00				156,000.00		96,000.00		252,000.00
Total Activity Cost	300,000.00
Remaining Activity Cost	48,000.00				29,714.29		18,285.71		48,000.00
To be allocated in the ratio of 156:96
Approx. cost					185,714.29		114,285.71
	J	K	L=J-K	M=L/J
Answer 3	Full ABC	Approx. cost	Relative Error	Relative Error %
Model X	171,000.00	185,714.29	(14,714.29)	-8.60%
Model Y	129,000.00	114,285.71	14,714.29	11.41%
Total Activity Cost	300,000.00	300,000.00	-