Question

OBJECTIVE CORNERSTONE 4.10 Cornerstone Exercise 4.10 Simplifying the ABC System: Equally Accurate Reduced ABC Systems Selected activities and other information are provided for Patterson Company for its most recen year of operations. Expected Consumption Ratios Wafer B Activity 7. Inserting dies 8. Purchasing materials Driver Number of dies Number of purchase orders Engineering hours Test hours Quantity 2,000,000 2,500 Wafer A 0.70 0.20 0.30 0.80 1. Developing test programs 3. Testing products ABC assignment Total overhead cost 10,000 20,000 0.25 0.60 $1,500,000 0.75 0.40 $1,500,000 $3,000,000

Answer 1

Part 1

Global ratios:

Wafer A =(1500000/3000000)= 0.5

Wafer B =(1500000/3000000)= 0.5

Equations:

Wafer A: 0.7 w1 + 0.2 w2 = 0.5

Wafer B: 0.3 w1 + 0.8 w2=0.5

Multiplying both side of the equation 1 by 4 and subtracting second from first gives,

w1=0.60 w2=0.40

Therefore,

Inserting dies cost pool = 3000000*0.60 = $1800000

Purchasing cost pool = 3000000*0.40 = $1200000

Part 2

Wafer A : (0.70 *$1800000) + (0.20 * $1200000) = 1260000+240000 = 1500000

Wafer B: (0.30* $1800000)+ (0.80 *$1200000) = 540000+960000 = 1500000

Part 3

Global ratios:

Wafer A =(1500000/3000000)= 0.5

Wafer B =(1500000/3000000)= 0.5

Equations:

Wafer A: 0.25 w1 + 0.60 w2 = 0.5

Wafer B: 0.75 w1 + 0.40 w2=0.5

Multiplying both side of the equation 1 by 3 and subtracting second from first gives,

w1=0.29 w2=0.71

Thus,

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

Testing Products Cost Pool= 3000000*0.71 = $2130000

Wafer A: (0.25 *$870000) + (0.60 *2130000 )= 1260000+240000 = $1495500

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