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		69,000		Development hours			0.10				0.90
3.		Testing products		500,000		Test hours			0.65				0.35
4.		Setting up batches		140,000		Number of batches			0.60				0.40
5.		Engineering design		99,000		Number of change orders			0.20				0.80
6.		Handling wafer lots		400,000		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		500,000		Number of purchase orders			0.20				0.80
9.		Unloading materials		66,000		Number of receiving orders			0.35				0.65
10.		Inspecting materials		84,000		Inspection hours			0.60				0.40
11.		Moving materials		400,000		Distance moved			0.50				0.50
12.		Paying suppliers		39,000		Number of invoices			0.30				0.70
		Total activity cost	$	3,042,000

Unit-level (plantwide) cost assignmenta		$2,281,500		$760,500
Activity cost assignmentb		$1,517,150		$1,524,850

^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.

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	$fill in the blank 1
Handling wafer lots	$fill in the blank 2
Inserting dies	$fill in the blank 3
Purchasing materials	$fill in the blank 4
Moving materials	$fill in the blank 5
Total activity cost	$fill in the blank 6

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 $713,000 and the remaining activities had a cost of $23,750 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	$fill in the blank 11
Cost by an approximately relevant ABC approach	$fill in the blank 12

Feedback

1. Take the five most expensive activities and calculate OH cost assigned to each product. The remaining items are totaled and this is the amount used to allocate the overhead for them to the five activities which are most expensive using the proportion for each activities cost.

2. Relative error Ratio 1: = (total approx. ABC cost - Activity cost assignment) Activity cost assignment.

3. Change amounts and recalculate the consumption ratios to use for finding out the ABC cost of Wafer A. Activity Based costing uses both unit-level and non-unit-level drivers and reflects a more accurate picture of actual OH consumed. Simplification approach eliminates the need to identify resource drivers to assign resource costs to activities, eliminating the need for much of the details.