Question

Bayview Manufacturing Company has an accounts receivable department that performs three activities within the department: invoicing customers, processing customer credit applications, and performing collection activities. During interviews, the employee survey reports that they spend 15 percent of their time invoicing customers, 55 percent of their time processing credit applications, and 30 percent of their time on collection activities. The accounts receivable department employs 10 associates for a total monthly cost of $50,000. Assume each associate works 8 hours per day, 20 days per month, but an estimate of practical capacity is 80 percent. After close observation of the employee’s daily work, managers conclude the following:

Invoicing a Customer:	35 minutes
Processing a Credit Application:	10 minutes
Collection activities:	20 minutes

                                                                        

The estimated monthly quantities of work in the three activities are 300 invoices, 4,000 credit applications, and 1,150 collection calls.

Required:

1. Under a traditional ABC system, what is the cost of one unit of activity (round to 2 decimal places)? (10pts)

2. Assuming the practical capacity information, what is the cost per minute of supplying capacity (round to 2 decimal places)? (5pts)

3. Under time-driven ABC, what are the cost driver rates for each activity? (5 pts)

Answer 1

Step 1: -Calculating Activity cost driver rate as per traditional ABC System

Step 2: - Calculating Cost per minute of supplying capacity, using practical capacity

Step 3:- Calculating Activity cost driver rate, under Time Driven ABC System.