Question

Simplifying the ABC System: Equally Accurate Reduced ABC Systems Selected activities and other information are provided for Patterson Company for its most recent year of operations. Expected Consumption Ratios Activity Driver Quantity Wafer A Wafer B 7. Inserting dies Number of dies 2,000,000 0.70 0.30 Number of purchase 8. Purchasing materials 2,500 0.20 0.80 orders 1. Developing test programs Engineering hours 10,000 0.25 0.75 3. Testing products Test hours 20,000 0.60 0.40 ABC assignments $1,500,000 $1,500,000 Total overhead cost $3,000,000 Required: 1. Form reduced system cost pools for activities 7 and 8. Round any division to 9 decimal places in your computations. Round your final answers to the nearest dollar. Inserting dies cost pool Purchasing cost pool 2. Assign the costs of the reduced system cost pools to Wafer A and Wafer B. Round any division to 9 decimal places in your computations. Round your final answers to the nearest dollar. Wafer A Wafer B 3. What if the two activities were 1 and 37 Repeat Requirements 1 and 2. Form reduced system cost pools for activities 1 and 3. Round any division to 9 decimal places in your computations. Round your final answers to the nearest dollar. Developing test programs cost pool Testing products cost pool

Answer 1

1. Inserting dies = 0.7 - 0.3 = 0.4

Purchasing materials = 0.2 - 0.8 = 0.6

Overhead costs should be assigned in 0.6:0.4

Inserting dies = $300,000 * 0.6 / 1 = $180,000

Purchasing materials = $300,000 * 0.4 / 1 = $120,000

2. Cost assigned to Wafer A

Inserting dies ($180,000*0.7)	126,000
Purchasing materials ($120,000*0.2)	24,000
Total Cost assigned to Wafer A	150,000

Cost assigned to Wafer B

Inserting dies ($180,000*0.3)	54,000
Purchasing materials ($120,000*0.8)	96,000
Total Cost assigned to Wafer B	150,000

3. Inserting dies = 0.25 - 0.75 = 0.50

Purchasing materials = 0.6 - 0.4 = 0.20

Overhead costs should be assigned in 0.2/0.7 : 0.5/0.7

Inserting dies = $300,000 * 0.2 / 0.7 = $85,714

Purchasing materials = $300,000 * 0.5 / 0.7 = $214,286

Cost assigned to Wafer A

Inserting dies ($85,714*0.25)	21429
Purchasing materials ($214,286*0.6)	128,571
Total Cost assigned to Wafer A	150,000

Cost assigned to Wafer B

Inserting dies ($85,714*0.75)	64,286
Purchasing materials ($214286*0.4)	85,714
Total Cost assigned to Wafer B	150,000