Cornerstones of Cost Management 2nd Edition by Don Hansen ,Maryanne Mowen

Exercise 38

Simplifying the ABC System: Approximately Relevant ABC Systems
Patterson Company produces wafers for integrated circuits. Data for the most recent year are provided:

a Calculated using number of dies as the single unit-level driver.
b Calculated by multiplying the consumption ratio of each product bythe 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.
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.