Question

Having trouble with #5

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 Average salary per employee Weeks of employment per year Hours worked per week Practical capacity percentage 9 $28,000 52 40 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 10 7 6 Number of bid evaluations 2 1 3 Number of inspections 1 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 7,100 Bid Evaluation Inspection 8,650 Activity demands for all jobs 10,500 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

Calculation of Employee costs-

Particulars	Amounts
No.of employees	9
Average salary per employee	$ 28000
Total salary for the year	$ 252000
Weeks of the employment per year	52
Hours per week / employee	40
Total No. of hours/ employee p.a	2080
Total No. of hours of all the employees for the year	18720
Practical capacity %	85%
Usable capacity	15973.50
Cost / minute (252000/(18720*60))	0.23

2) Calculating cost for activities required:

Particulars	Job X	Job Y	Job Z	Total
Requisitions Processed	10	7	6
Time for requisition processing @ 15 mins.	150	105	90	345
Bid Evaluations	2	1	3
Time Required for Bid Evaluation @ 45 mins	90	45	135	270
No. of Inspections	5	1	5
Time Required for Inspection @ 30 mins	150	30	150	330
Total Time Required (Mins.)	390	180	375

3) Based on revised activity demands - values are calculated as follows:

Particulars	Requisition Processing	Bid Evaluation	Inspection	Total
Total Demand (a)	7100	8650	10500
Mins/Unit (b)	15	45	30
Total Time (Mins.) = (c=a*b)	106500	389250	315000	810750
Practical capacity (d)	85%	85%	85%
Total Time required (e=c/d)	125294.12	457941.18	370588.24
Total Hours Required (f=e/60)	2088.23	7632.35	6176.47	15897.15
Total No. of employees required = Hours demanded / 2080 (g)				7.64 i.e. 8 emloyees.
Total cost of 8 employees (h =g*28000)				224000
Allocation of cost between activities (i=h/15897.15*f)	29424.64	107545.22	87030.14	224000
Cost/Hour (j=i/f)	$ 14.09	$14.09	$14.09
Cost per minute (k = j/60)	$ 0.23	$ 0.23	$ 0.23

3) Impact on expenses of matching capacity with demand:

Earlier total cost were = $ 252000

Now revised costs are = $ 224000

Hence, cost has reduced as a result of matching of capacity with demands.

4) Considering the revised activity demands labour costs assigned to each of the three activities:

Particulars	Job X	Job Y	Job Z	Total
Requisitions Processed	10	7	6
Time for requisition processing @ 15 mins.	150	105	90	345
Bid Evaluations	2	1	3
Time Required for Bid Evaluation @ 45 mins	90	45	135	270
No. of Inspections	5	1	5
Time Required for Inspection @ 30 mins	150	30	150	330
Total Time Required (Mins.)	390	180	375
Cost / Min	$0.23	$0.23	$0.23
Total cost	$89.70	$41.40	$86.25

2) Using the revised activity demands will not affect labour costs assigned to Job X, Y and Z since using the revised demand has not either reduced the no of activities used per unit of product X,Y and Z neither has the labour rate per hour has changed.

3) Using the revised capacity Used capacity in minutes is 810750 mins i.e. 13512.50 hrs. (calculated in table above)

4) Using the revised capacity unused capacity is = (8*52*40 - 13512.50 = 2487.50 Hours).