Question

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		19
Average salary per employee	$	23,500
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	7			4	3
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	13,000	16,000	20,400

Required:

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.)

Answer 1

1. Employee   salary is fixed and it is allocated or divided between jobs based on the time taken for performing the individual activities that are necessary to complete the job.Naturally the cost per activity will go down ,when more no.of activities share the cost ,as long as the total time is within the practical capacity of 2015520 minutes.
From the above, the total cost assigned to Jobs X,Y,Z will go down , due to the revised demand.
2. Used capacity in minutes
Requisition Processing	13000*15=	195000
Bid evaluation	16000*45=	720000
Inspection	20400*30=	612000
Total Min.		1527000
3. Unused capacity in minutes
Total practical capacity in minutes=	19*52*40*60*85%=	2015520
Used capacity in minutes(as in 2)=		1527000
Unused Capacity in minutes=		488520
4.Unused capacity in no.of employees
488520/(52*40*60*85%)
4.605
5
For a practical capacity of 2015520 minutes ,salary expense will be	23500*19=	446500
Impact on expenses will be
446500/2015520*1527000=
338277.71
Or
Basing on no.of employees
1527000/(52*40*60*85%)employees at $ 23500 each
1527000/(52*40*60*85%)*23500 =
338277.71
Answers
1	Yes
2. Used capacity	1527000
3. Unused capacity	488520
4.Unused in t/o employees.	4.60 employees
5. Used in T/o costs	$338,277.71