Question

Athens Company is conducting a time-driven activity-based costing study in its Engineering Department. To ald the study, the company provided the following data regarding Its Engineering Department and the customers served by the department: Number of employees Average salary per employee Weeks of employment per year Hours worked per week Practical capacity percentage $80,000 40 85€ New Product Design Engineering Change Orders Product Testing Hours per unit of the activity 40 20 Customer A Customer B Customer c 11 Customers Number of new products designed Number of engineering change orders Number of products tested Required: 1. Using the customer cost analysis as demonstrated in Exhibit 7A-2 in your textbook, compute the following: a. The cost per hour of the resource supplied in the Engineering Department. b. The time-driven activity rate per hour for each of Athens' three activities. C. The total engineering costs consumed by Customer A, Customer B, and Customer C. 2. Using the capacity analysis as demonstrated in Exhibit 7A-3 in your textbook, compute the following: a. The used capacity in hours. b. The unused capacity in hours. c. The unused capacity in number of employees. d. The impact on expenses of matching capacity with demand.

Answer 1

Solution

Athens Company

1. Using customer cost analysis –

a	Cost per hour of resource supplied	$45.25
b	Time driven activity rate:
	New Product Design	$1,810
	Engineering Change Orders	$905
	Product Testing	$362
c	Total engineering labor costs assigned to:
	Customer A	$15,928
	Customer B	$9,955
	Customer C	$14,299

Computations:

1. Computation of the cost per hour of the resource supplied in the Engineering Department:

Total cost of labor supplied in the engineering department
Number of employees	10
Average salary per employee	$80,000	$800,000
Practical capacity in terms of labor hours
Number of employees	10
employment weeks per year	52
weekly working hours	40
practical capacity	85%
Practical capacity in terms of labor hours	10 x 52 x 40 x 85%	17,680 hours
average cost per labor hour in the Engineering Department		$800,000/17,680 = $45.25 per hour

2. Computation of the time-driven activity rate per hour for each of the company’s three activities:

Activity	New Product Design	Engineering Change Orders	Product Tests
Hours per unit of activity	40	20	8
Resource cost per hour	$45.25	$45.25	$45.25
Activity rate	$1,810	$905	$362

3. Computation of the total engineering costs consumed by Customer A, Customer B and Customer C:

	Total consumed costs:
Customer A	$15,928
Customer B	$9,955
Customer C	$14,299
Total	$40,182

Computations:

	Activity costs consumed by Customer A -
Activity	Activity Rate	Activity Usage	Activity Cost
New Product Design	$1,810	5	$9,050
Engineering Change Orders	$905	4	$3,620
Product Testing	$362	9	$3,258
Total activity cost consumed by Customer A			$15,928

	Activity costs consumed by Customer B -
Activity	Activity Rate	Activity Usage	Activity Cost
New Product Design	$1,810	4	$7,240
Engineering Change Orders	$905	1	$905
Product Testing	$362	5	$1,810
Total activity cost consumed by Customer B			$9,955

	Activity costs consumed by Customer C -
Activity	Activity Rate	Activity Usage	Activity Cost
New Product Design	$1,810	6	$10,860
Engineering Change Orders	$905	1	$905
Product Testing	$362	7	$2,534
Total activity cost consumed by Customer C			$14,299

2. Using the capacity analysis:

a	Engineering hours used to meet demand	13,140
b	Unused capacity in hours	4,270
c	Unused capacity in terms of number of employees	2
d	impact on expenses on matching capacity to demand	$160,000

Computations:

1. Computation of the used capacity in hours:

Activity	Hours per unit of activity	All Customers	Engineering hours used
New Product Design	40	175	7,000
Engineering Change Orders	20	245	4,900
Product Testing	8	155	1,240
Total			13,140

2. Computation of the unused capacity in hours:

Unused capacity in hours -
Practical capacity available in terms of labor hours	17,680
Engineering hours used to meet demand	13,140
Unused capacity in hours	4,270

3. Computation of the unused capacity in terms of number of employees:

Unused capacity in terms of employees
Unused capacity in hours	4,270
average capacity per employee	1,768	(17,680/10 employees)
Unused capacity in terms of employees	2.42

4. Computation of the impact on expenses of matching capacity with demand:

Computations:

Unused capacity in terms of employees = 2 (rounded off)

Average cost per employee = $80,000

Labor savings resulting from matching capacity with demand = $160,000

3. Assuming business expansion with following changes,

New product designs 245

Engineering change orders 315

Product tests   235

1. Calculation of the used capacity in hours –

Activity	Hours per unit of activity	All Customers	Engineering hours used
New Product Design	40	245	9,800
Engineering Change Orders	20	315	6,300
Product Testing	8	235	1,880
Total			17,980

Used capacity in hours = 17,980

2. Calculation of the unused capacity in hours:

Unused capacity in hours -
Practical capacity available in terms of labor hours	17,680
Engineering hours used to meet demand	17,980
Unused capacity in hours -	-300

3. Calculation of the unused capacity in terms of employees:

Unused capacity in terms of employees
Unused capacity in hours	-300
average capacity per employee	1,768	(17,680/10 employees)
Unused capacity in terms of employees	-0.17

4. Impact on expenses of matching capacity with demand –

Likely addition of employee        1

Average cost per employee          $80,000

Hence, impact = potential labor expense increase by $80,000