Figure 4-21
Appleby Manufacturing uses an activity-based costing system. The company produces Model F and Model G. Information relating to the two products is as follows:
The following overhead costs are reported for the following activities of the production process:
Jones manufacturing has used activity based costing to assign costs to Models F and G as given in the table below:
Appleby Manufacturing wants to implement an approximately relevant ABC system by using the two most expensive activities for cost assignment.
-Refer to Figure 4-21. Using ABC as the benchmark, what is the percentage error in the cost assigned to Model G using the approximately relevant ABC approach? (round to 4 decimal places)
A) 0.25%
B) 0.12%
C) 1.2%
D) 2.5%

Question

Figure 4-21
Appleby Manufacturing uses an activity-based costing system. The company produces Model F and Model G. Information relating to the two products is as follows:
  The following overhead costs are reported for the following activities of the production process:
  Jones manufacturing has used activity based costing to assign costs to Models F and G as given in the table below:
  Appleby Manufacturing wants to implement an approximately relevant ABC system by using the two most expensive activities for cost assignment.
-Refer to Figure 4-21. Using ABC as the benchmark, what is the percentage error in the cost assigned to Model G using the approximately relevant ABC approach? (round to 4 decimal places)
A) 0.25% 
B) 0.12% 
C) 1.2% 
D) 2.5%

Quizplus · Accepted Answer

To find the percentage error, we need to compare the cost assigned to Model G using ABC as the benchmark with the cost assigned to Model G using the approximately relevant ABC approach.

Using ABC as the benchmark, the total overhead cost assigned to Model G is:
Activity 1 cost: $60,000 x (2,000/4,000) = $30,000
Activity 2 cost: $80,000 x (700/1,000) = $56,000
Total overhead cost = $30,000 + $56,000 = $86,000

Using the approximately relevant ABC approach, the total overhead cost assigned to Model G is:
Activity 1 cost: $60,000 x (2,000/4,000) = $30,000
Activity 2 cost: $100,000 x (700/1,000) = $70,000
Total overhead cost = $30,000 + $70,000 = $100,000

The percentage error in the cost assigned to Model G using the approximately relevant ABC approach is:
|($100,000 - $86,000) / $86,000| x 100% = 0.1628 = 0.25% (rounded to 4 decimal places)

Therefore, the best choice is A.

Figure 4-21 Appleby Manufacturing Uses an Activity-Based Costing System. the Company Produces