Question 2 Electronic Chemicals produces silicon wafers (units on which electronic circuits are printed). The manufacturing process is organised in two main departments, Department A and Department B. The firm currently manufactures two main types of wafers targeting different markets: standard wafers (produced in large volumes for customers in the microprocessors industry) and specialty wafers (highly customised and produced in low volumes for customers manufacturing advanced biomedical devices). Indirect costs are associated with three main activities: machining, polishing and quality inspection. The tables below detail the machine hours, number of polishing rounds and number of quality inspections required by the two models in the two departments in the last month, as well as the machining, polishing and quality inspection costs incurred in the two departments during the same period: Department A Machine hours No. of polishing No. of quality inspections rounds Standard wafers 2400 60 40 Specialty wafers 900 150 90 Total 3300 210 130 Machining costs: Polishing costs: 120,000 Quality inspection 180,000 costs: 40,000 Machine hours No. of quality No. of polishing inspections rounds Standard wafers 1900 40 100 Specialty wafers 1600 100 200 Total 3500 140 300 Machining costs: 120,000 Polishing costs: 90,000 Quality inspection costs: 60,000 Department B [Question 2 continued] The firm is considering changing its costing system (aka approach to overhead allocation). Currently, indirect costs are aggregated in a single pool (610,000) and allocated based on machine hours. A consultant has recently suggested that the "true" resource consumption is captured by a costing system that organizes costs both by activity and by department (therefore using six cost pools), and allocates, in each department, machining costs based on machine hours, polishing costs based on number of polishing rounds, and quality inspection costs based on number of inspections. The consultant referred to this system as the "benchmark" system. You are the company's chief management accountant, and are considering two additional costing systems, System 1 and System 2. Under System 1, indirect costs are subdivided into two departmental cost pools and allocated based on number of machine hours. Under System 2, indirect costs are subdivided into three activity cost pools; total machining costs are allocated based on machine hours, total polishing costs are allocated based on number of polishing rounds, and total quality inspection costs are allocated based on number of quality inspections performed. Required: (a) Calculate the total indirect cost of standard wafers and specialty wafers (i) under the current costing system, (ii) under System 1, (iii) under System 2, and iv) under the "benchmark" system. [25 marks] (b) Based on your calculations in (a) above and any other calculations you deem appropriate, and assuming that the "benchmark" costing system provides an accurate representation of how indirect costs are incurred, discuss whether System 1 is an improvement on the current system. [20 marks] (c) Based on your calculations in (a) above and any other calculations you deem appropriate, and assuming that the 'benchmark' costing system provides an accurate representation of how indirect costs are incurred, discuss whether System 2 is an improvement on the current system. [20 marks] Question 2 Electronic Chemicals produces silicon wafers (units on which electronic circuits are printed). The manufacturing process is organised in two main departments, Department A and Department B. The firm currently manufactures two main types of wafers targeting different markets: standard wafers (produced in large volumes for customers in the microprocessors industry) and specialty wafers (highly customised and produced in low volumes for customers manufacturing advanced biomedical devices). Indirect costs are associated with three main activities: machining, polishing and quality inspection. The tables below detail the machine hours, number of polishing rounds and number of quality inspections required by the two models in the two departments in the last month, as well as the machining, polishing and quality inspection costs incurred in the two departments during the same period: Department A Machine hours No. of polishing No. of quality inspections rounds Standard wafers 2400 60 40 Specialty wafers 900 150 90 Total 3300 210 130 Machining costs: Polishing costs: 120,000 Quality inspection 180,000 costs: 40,000 Machine hours No. of quality No. of polishing inspections rounds Standard wafers 1900 40 100 Specialty wafers 1600 100 200 Total 3500 140 300 Machining costs: 120,000 Polishing costs: 90,000 Quality inspection costs: 60,000 Department B [Question 2 continued] The firm is considering changing its costing system (aka approach to overhead allocation). Currently, indirect costs are aggregated in a single pool (610,000) and allocated based on machine hours. A consultant has recently suggested that the "true" resource consumption is captured by a costing system that organizes costs both by activity and by department (therefore using six cost pools), and allocates, in each department, machining costs based on machine hours, polishing costs based on number of polishing rounds, and quality inspection costs based on number of inspections. The consultant referred to this system as the "benchmark" system. You are the company's chief management accountant, and are considering two additional costing systems, System 1 and System 2. Under System 1, indirect costs are subdivided into two departmental cost pools and allocated based on number of machine hours. Under System 2, indirect costs are subdivided into three activity cost pools; total machining costs are allocated based on machine hours, total polishing costs are allocated based on number of polishing rounds, and total quality inspection costs are allocated based on number of quality inspections performed. Required: (a) Calculate the total indirect cost of standard wafers and specialty wafers (i) under the current costing system, (ii) under System 1, (iii) under System 2, and iv) under the "benchmark" system. [25 marks] (b) Based on your calculations in (a) above and any other calculations you deem appropriate, and assuming that the "benchmark" costing system provides an accurate representation of how indirect costs are incurred, discuss whether System 1 is an improvement on the current system. [20 marks] (c) Based on your calculations in (a) above and any other calculations you deem appropriate, and assuming that the 'benchmark' costing system provides an accurate representation of how indirect costs are incurred, discuss whether System 2 is an improvement on the current system. [20 marks]