Simplifying the ABC System Equally Accurate Reduced ABC Syst

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 Driver Number of dies Number of purchase Wafer B 0.30 0.80 Activity Quantity Wafer A 0.70 7. Inserting dies 8. Purchasing materials 1. Developing test programs 2,000,000 2,500 10,000 0.20 0.25 0.60 $1,500,000 orders Engineering hours Test hours 0.75 0.40 $1,500,000 $3,000,000 3. Testing products 20,000 ABC assignments Total overhead cost 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

Solution

1. Global ratios = 0.50 for Wafer A (1500000/3000000) and 0.50 for Wafer B (1500000/3000000)

Equations:

0.70w1+0.20w2 = 0.50 (Wafer A)

0.30w1+0.80w2 = 0.50 (Wafer B)

Multiplying both side of the quation 1 by 4 and subtracting second from first

which implies on solving,

w1=0.6 w2=0.4

THerefore Inserting Dies Cost Pool = $3000000*0.6=$1800000

THerefore Purchasing Cost Pool = $3000000*0.4=$1200000

2. Using the above consumption ratios, same Cost Assignment is realised with the above cost drivers:

Wafer A : 0.70 x $1800000 + 0.20 x $1200000 = 1260000+240000 = 1500000

Wafer B: 0.30 x $1800000+ 0.80 x $1200000 = 540000+960000 = 1500000

3. Global ratios = 0.50 for Wafer A (1500000/3000000) and 0.50 for Wafer B (1500000/3000000)

Equations:

0.25w1+0.60w2 = 0.50 (Wafer A)

0.75w1+0.40w2 = 0.50 (Wafer B)

Multiplying both side of the quation 1 by 3 and subtracting second from first

which implies on solving,

w1=0.29 w2=0.71

THerefore Developing test programs Cost Pool = $3000000*0.29=$870000

THerefore Testing Products Cost Pool = $3000000*0.71=$2130000

2. Using the above consumption ratios, same Cost Assignment is realised with the above cost drivers:

Wafer A : 0.25 x $870000+ 0.60 x $2130000 = 1260000+240000 = $1495500

Wafer B: 0.75 x $870000+ 0.40 x $2130000 = 540000+960000 = $1504500