Question

Exercise 7A-3 Time-Driven Activity-Based Costing [LO 7-6, LO 7-7] Saratoga Company manufactures jobs to customer specifications. The company is conducting a time-driven activity-based costing study in its Purchasing Department to better understand how Purchasing Department labor costs are consumed by individual jobs. To aid the study, the company provided the following data regarding its Purchasing Department and three of its many jobs: Number of employees 23 Average salary per employee $ 21,500 Weeks of employment per year 52 Hours worked per week 40 Practical capacity percentage 85 % Requisition Processing Bid Evaluation Inspection Minutes per unit of the activity 15 45 30 Job X Job Y Job Z Number of requisitions processed 11 8 7 Number of bid evaluations 3 2 4 Number of inspections 6 2 6 Now assume that Saratoga Company would like to answer the following “what if” question using its time-driven activity-based costing system: Assuming our estimated activity demands for all jobs in the next period will be as shown below, how will this affect our job costs and our staffing levels within the Purchasing Department? Requisition Processing Bid Evaluation Inspection Activity demands for all jobs 19,400 22,600 24,800 1. Will the revised activity demands affect the total Purchasing Department labor costs assigned to Job X, Job Y, and Job Z? 2. Using the revised activity demands, calculate Saratoga’s used capacity in minutes. 3. Using the revised activity demands, calculate Saratoga’s unused capacity in minutes. 4. Using the revised activity demands, calculate Saratoga’s unused capacity in number of employees. (Round your answer to 2 decimal places.) 5. Based on the revised activity demands, calculate the impact on expenses of matching capacity with demand. (Be sure to round down your potential adjustment in the number of employees to a whole number. Negative amount should be indicated by a minus sign.)

accounting 226. Managerial accounting

Answer 1

1. Total used capacity in minutes

Requisition processing (19,400 * 15)	291000
Bid Evaluation (22,600 * 45)	1017000
Inspection (24,800 * 30)	744000
Total used capacity in minutes	2052000

2. Total unused capacity in minutes

Total practical capacity in minutes	2439840
Less: Total used capacity in minutes	2052000
Total unused capacity in minutes	387840

3. Unused capacity in number of employees = 387840 / 52 weeks * 40 hours per week * 60 minutes per hour * 85%

= 3.66

4. Impact on expense = Average salary * Unused capacity in number of employees

= 21500 * 3 (rounded down)

= 64500