Question

The company for which you work recently implemented time-driven activity-based costing (TDABC) in conjunction with its enterprise resource planning (ERP) system. Management is pleased with the revised product and customer cost information that the TDABC system produces. It is now wondering how this system can be used for budgeting purposes. You have been asked to provide an example of using time-driven activity based budgeting, given the following information: 1. There are two resources (departments): indirect labor and computer support 2. There are two primary activities that these resources support handling production runs and product-level support 3. Indirect labor support is consumed as follows: a. To handle production runs: 10 hours/run. b. To support products: 680 hours/product 4. Computer support is consumed as follows: a. To handle production runs: 2.2 hours/run. b. To support products: 68 hours/product. 5. Resource practical capacity levels: a. Indirect labor: 23,600 hours per quarter b. Computer support: 680 hours per quarter 6. Cost of supplying resources a. Indirect labor: $1,604,800 per quarter b. Computer support: $523,600 per quarter Required: 1. Calculate the budgeted resource cost per hour (at practical capacity) for each of the two resources, indirect labor support and computer support 2. Determine the budgeted cost-driver rates for each of the two activities, handle production runs and support products 3. Suppose that the total cost of resources supplied for the quarter just ended was exactly as budgeted (i.e., $2,128,400) but that only 21,600 indirect labor hours were used along with 630 computer hours. Calculate, for each resource, the cost of idle capacity 4. After implementing a total quality management (TQM) program, the company was able to implement process-efficiency changes, the end result of which was a 20% reduction in the indirect labor time associated with the activity handling production runs. Recalculate the indirect labor cost component of the cost to handle a production run. Also, recalculate the cost of idle capacity for indirect labor assuming the original facts but with the 20% efficiency gain. Assume that in the original case facts, 17,800 of the 21,600 hours relate to the activity handling production runs (while the remaining 3,800 hours relate to the activity product-level support). Complete this question by entering your answers in the tabs below. Complete this question by entering your answers in the tabs below Required 1 Required 2 Required 3 Required4 Calculate the budgeted resource cost per hour (at practical capacity) for each of the two resources, i and computer support. BudgetedPractical Budgeted Cost per Resource Cost (Hours) Hour Indirect labor support Computer support Requiradi Required 2 > Complete this question by entering your answers in the tabs below Required 1Required 2 Required 3 Required 4 Determine the budgeted cost-driver rates for each of the two activities, handle production runs and support products. Activity #1: Handle production runs Activity #2. Support products per run per product KRequired 1 Required 3> Complete this question by entering your answers in the tabs below Required 1 Required 2 Required Required 4 Suppose that the total cost of resources supplied for the quarter just ended was exactly as budgeted (i.e., $2,128,400) but that only 21,600 indirect labor hours were used along with 630 computer hours. Calculate, for each resource, the cost of idle capacity Cost of Idle Capacity Resource Indirect labor Computer support Cost of idle capacity should be Required 4 > Required 2 Complete this question by entering your answers in the tabs below Required 1 Required 2 Required 3Required 4 After implementing a total quality management (TQM) program, the company was able to implement process-efficiency changes, the end result of which was a 10% reduction in the indirect labor time associated with the activity handling production runs. Recalculate the indirect labor cost component of the cost to handle a production run. Also, recalculate the cost of idle capacity for indirect labor assuming the original facts but with the 10% efficiency gain. Assume that in the original case facts, 16,000 of the 18,000 hours relate to the activity handling production runs (while the remaining 2,000 hours relate to the activity product-level support). Show lessA Revised Budgeted Cost-Driver Rate Budgeted Cost Resource Driver Indirect labor per run Revised Cost of Idle Capacity: Cost of Idle Capacity Resource Indirect labor Required 3

Answer 1

Resource	Budgeted Cost	Practical Capacity (Hrs)	Budgeted Cost per Hr
Indirect Labor Support	1604800	23600	68
Computer Support	523600	680	770
Handle Production Runs	68*10+770*2.2		2374	per run
Support Products	68*680+770*68		98600	per product
Resource	Cost of Idle Capacity
Indirect Labor Support	1604800-(21600*68)		136000
Computer Support	523600-(630*770)		38500
Cost of Idle capacity should be assigned to the person or office that authorized the level of capacity when the capacity was acquired
Revised Budgeted Cost Driver Rate
Resource	Budgeted Cost Driver Rate
Indirect Labor	68*8	544	per run
Revised Cost of Idle Capacity
Resource	Cost of Idle Capacity
Indirect Labor	1604800-(16240*68)		500480
Resource Units Used	2000+17800*(1-20%)		16240