Question

Calculator 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 water Wafer B 7. Ingenting dies Number of die 1,800,000 Number of purchase Purchaung materials 2,700 Enging hours 0.25 0.75 10.500 19,000 Test hours 024 1. Developing test programs 3. Testing products ABC assignments Total overhead cost $175.000 $175,000 $350,000 Required: 1. Form reduced system cost pools for activities 7 and 8. Do not round interim calculations, Round your first answers to the nearest dollar LGO LGO Parc o s pool 2. A n the cost of the reduced wystem copot War A und water. Do not round interim cations Round your finalwers to the nearest dollar WA Water ALGO 3. What if the two cities were d e s

Answer 1

Ans

1.

First calculate Global ratios for:

Wafer A = 0.50 ($175,000/$350,000)

Wafer B = 0.50 ($175,000/$350,000)

Now Equations are as follows:

Wafer A = 0.70 w ₁ + 0.20 w ₂ = 0.50

Wafer B = 0.30 w ₁ + 0.80 w ₂ = 0.50

Multiplying both sides of the first equation by 4, subtracting the second from the first, and solving, we obtain:

w ₁ = 0.60 and w ₂ = 0.40

Inserting dies cost pool: 0.6 × $350,000 = $210,000

Purchasing cost pool: 0.4 × $350,000 = $140,000

2.

By using the consumption ratios, the same ABC cost assignment is realized with two drivers:

Wafer A: (0.70 × $ 210,000) + (0.20 × $ 140,000) = $ 147,000 + $ 28,000 = $ 175,000

Wafer B: (0.30 × $210,000) + (0.80 × $140,000) = $ 63,000 + $ 112,000 = $ 175,000

3.

First calculate Global ratios for:

Wafer A = 0.50 ($175,000/$350,000)

Wafer B = 0.50 ($175,000/$350,000)

Equations:

Wafer A = 0.25 w ₁ + 0.60 w ₂ = 0.50

Wafer B = 0.75 w ₁ + 0.40 w ₂ = 0.50

Multiplying both sides of the first equation by 3, subtracting the second from the first, and solving, we obtain:

By solving we get : w ₁ = 2/7 and w ₂ = 5/7

Developing test programs cost pool = (2/7) × $350,000 = $100,000

Testing products cost pool = (5/7) × $350,000 = $250,000

Assign the cost of the reduced system cost pools to Wafer A and Wafer B :

Wafer A: (0.25 × $ 100,000) + (0.60 × $250,000) = $ 25,000 + $ 150,000 = $ 175,000

Wafer B: (0.75 × $ 100,000) + (0.40 × $250,000) = $ 75,000 + $ 100,000 = $ 175,000