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	$	45,000		Engineering hours			0.25				0.75
2.		Making probe cards		65,000		Development hours			0.10				0.90
3.		Testing products		500,000		Test hours			0.65				0.35
4.		Setting up batches		130,000		Number of batches			0.55				0.45
5.		Engineering design		93,000		Number of change orders			0.15				0.85
6.		Handling wafer lots		200,000		Number of moves			0.40				0.60
7.		Inserting dies		700,000		Number of dies			0.75				0.25
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		300,000		Distance moved			0.55				0.45
12.		Paying suppliers		38,000		Number of invoices			0.30				0.70
		Total activity cost	$	2,606,000

Unit-level (plantwide) cost assignmenta		$1,954,500		$651,500
Activity cost assignmentb		$1,359,350		$1,246,650

^a Calculated using number of dies as the single unit-level driver. ^b 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. If required, round your answers to the nearest dollar.

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

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 $603,000 and the remaining activities had a cost of $24,250 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
Cost by an approximately relevant ABC approach