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		17
Average salary per employee	$	24,500
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	5			4	6
Number of inspections	8			4	8

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	10,800	13,700	16,200

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.)

Revised activity demands affect total purchasing department labor cost assigned to Jobs X Y and Z?	Yes /no?(only this one is a yes or no)
Used capacity in minutes
Unused capacity in minutes
Unused capacity in number of employees
Impact on expenses of matching capacity with demand

Answer 1

Answers
1	Yes
2. Used capacity	1264500
3. Unused capacity	538860
4.Unused in t/o employees.	5.08 employees
5. Used in T/o costs	$292,046

Calculations:-

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 1803360 minutes. (17*52*40*60*85%) . 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	10800*15=	162000
Bid evaluation	13700*45=	616500
Inspection	16200*30=	486000
Total Min.		1264500

3. Unused capacity in minutes
Total practical capacity in minutes=	17*52*40*60*85%=	1803360
Used capacity in minutes(as in 2)=		1264500
Unused Capacity in minutes=		538860

4.Unused capacity in no.of employees
538860/(52*40*60*85%)
5.08

5
For a practical capacity of 1803360 minutes ,salary expense will be	24500*17=	416500
Impact on expenses will be
416500/1803360*1264500=
292046
Or
Basing on no.of employees
1264500/(52*40*60*85%)employees at $ 24500 each
1264500/(52*40*60*85%)*24500 =
292046

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