Cornerstone Exercise 4.9 Simplifying the ABC System: Approximately Relevant ABC Systems Patterson Company produces wafers for integrated circuits. Data for the most recent year are provided: OBJE CORN Expected Consumption Ratios Activity Driver Wafer A Wafer B Inserting and sorting process activities: 1. Developing test programs 2. Making probe cards 3. Testing products 4. Setting up batches 5. Engineering design 6. Handling wafer lots 7. Inserting dies Procurement process activities: 8. Purchasing materials 9. Unloading materials 10. Inspecting materials 11. Moving materials 12. Paying suppliers Total activity cost S 50,000 60,000 Engineering hours Development hours Test hours 0.25 0.75 0.10 0.90 600,000 0.60 0.40 135,000 90,000 Number of batches 0.55 0.45 Number of change orders Number of moves 0.15 0.45 0.70 0.85 300,000 700,000 0.55 Number of dies 0.30 400,000 Number of purchase orders Number of receiving orders Inspection hours Distance moved 0.20 0.80 0.65 0.35 60,000 0.35 75,000 0.65 500,000 30,000 $3,000,000 0.50 0.50 Number of invoices 0.30 0.70 Unit-level (plantwide) cost assignment" Activity cost assignment" $2,100,000 $900,000 S1,500,000 $1,500,000 *Calculated using number of dies as the single unit-level driver. Calculated by multiplying the consumption ratio of each product by the cost of each activity.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Required:
1. Using the five most expensive activities, calculate the
uct. Assume that the costs of the other activities are assigned in proportion to the cost of the five activities.
2. Calculate the error relative to the fully specified ABC product cost and comment on the outcome.
3. What if activities 1, 2, 5, and 8 each had a cost of $650,000 and the remaining activities had
a cost of $50,000? Calculate the cost assigned to Wafer A by a fully specified ABC system
and then by an approximately relevant ABC approach. Comment on the implications for
the approximately relevant approach.
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 6 images
