Simplifying the ABC System: Approximately Relevant ABC Systems

Patterson Company produces wafers for integrated circuits. Data for the most recent year are provided:

							Expected Consumption Ratios
Activity						Driver		Wafer A				Wafer B
Inserting and sorting process activities:
1.		Developing test programs	$	50,000		Engineering hours			0.25				0.75
2.		Making probe cards		60,000		Development hours			0.10				0.90
3.		Testing products		600,000		Test hours			0.60				0.40
4.		Setting up batches		135,000		Number of batches			0.55				0.45
5.		Engineering design		90,000		Number of change orders			0.15				0.85
6.		Handling wafer lots		300,000		Number of moves			0.45				0.55
7.		Inserting dies		700,000		Number of dies			0.70				0.30
Procurement process activities:
8.		Purchasing materials		400,000		Number of purchase orders			0.20				0.80
9.		Unloading materials		60,000		Number of receiving orders			0.35				0.65
10.		Inspecting materials		75,000		Inspection hours			0.65				0.35
11.		Moving materials		500,000		Distance moved			0.50				0.50
12.		Paying suppliers		30,000		Number of invoices			0.30				0.70
		Total activity cost	$	3,000,000

Simplifying the ABC System: Approximately Relevant ABC Systems Patterson Company produces wafers for integrated circuits. Data for the most recent year are provided: Expected Consumption Ratios Activity Driver Wafer A Wafer B Inserting and sorting process activities: 1. $ 50,000 0.25 0.75 Engineering hours Development hours 2. 60,000 0.10 0.90 3. 600,000 Test hours 0.60 0.40 Developing test programs Making probe cards Testing products Setting up batches Engineering design Handling wafer lots 4. 135,000 0.55 0.45 5. 90,000 Number of batches Number of change orders Number of moves 0.15 0.85 6. 300,000 0.45 0.55 7. Inserting dies 700,000 Number of dies 0.70 0.30 400,000 0.20 0.80 60,000 0.35 0.65 Procurement process activities: 8. Purchasing materials 9. Unloading materials 10. Inspecting materials 11. Moving materials 12. Paying suppliers Number of purchase orders Number of receiving orders Inspection hours Distance moved 75,000 0.65 0.35 500,000 0.50 0.50 30,000 Number of invoices 0.30 0.70 Total activity cost $ 3,000,000 $2,100,000 $900,000 Unit-level (plantwide) cost assignmenta Activity cost assignment $1,500,000 $1,500,000 Calculated using number of dies as the single unit-level driver. Calculated by multiplying the consumption ratio of each product by the cost of each activity. Required: 1. Using the five most expensive activities, calculate the overhead cost assigned to each product. Assume that the costs of the other activities are assigned in proportion to the cost of the five activities. Activity Budgeted Activity Cost Testing products Handling wafer lots Inserting dies $ Purchasing materials $ Moving materials Total activity cost Approx. ABC Cost Wafer A Wafer B Approx. ABC Cost Wafer A Wafer B 2. Calculate the error relative to the fully specified ABC product cost. Round your calculation to three decimal places and the percentage answer to one decimal place. Relative error Wafer A % Wafer B % 3. What if activities 1, 2, 5, and 8 each had a cost of $650,000 and the remaining activities had a cost of $50,000 each? Calculate the cost assigned to Wafer A by a fully specified ABC system and then by an approximately relevant ABC approach. Cost by a fully specified ABC system II Cost by an approximately relevant ABC approach