Chapter 4, Problem 37P

Refer to the data given in Problem 4.36 and suppose that the expected activity costs are reported as follows (all other data remain the same):

The per unit overhead cost using the 14 activity-based drivers is $1,108 and $779 for Cylinder A and Cylinder B, respectively.

Required:

1. 1. Determine the percentage of total costs represented by the three most expensive activities.
2. 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. 3. Using the costs assigned in Requirement 2, calculate the percentage error using the ABC costs as a benchmark. Comment on the value and advantages of this ABC simplification.