Question

Zeta Department Store has developed the following information in order to develop a TDABC model for its accounts receivable department:

Activity	Estimated worker time to perform activity
manual processing of invoice and cash receipt	1.0 hour
electronic processing of invoice and electronic funds transfer	0.1 hour
maintain customer file	0.5 hour

The time to process payments of customer invoices depends on whether the customer pays the bill manually or electronically, as shown above. The time to maintain each customer file is the same for all customers. The annual cost of the accounts receivable department is $500,000, and the associated practical capacity of accounts receivable labor is 10,000 hours. The accounts receivable department has six employees.

(a) What is the capacity cost rate for the accounts receivable department?

(b) Zeta’s division 1 has 1,000 small- to medium-sized customers who annually generate a total of $10 million in sales, resulting in 4,000 invoices. These customers pay all their invoices manually. What is the annual activity-based cost associated with division 1’s customers?

(c) Zeta’s division 2 has 200 large customers who annually generate a total of $10 million in sales, resulting in 400 invoices. These customers pay all of their invoices electronically. What is the annual activity-based cost associated with division 2’s customers?

(d) Suppose half of Zeta’s division 1 customers change their method of payment to electronic next year. How many hours of accounts receivable labor will it require for 1,000 customers, 2,000 manual invoices, and 2,000 electronic invoices? How much will division 1 be charged for the accounts receivable function? Will Zeta’s costs decrease because of the shift to 50% electronic invoicing in division 1?

Answer 1

Solution :

(a)

Calculate the capacity cost rate.

annual cost is $500,000 and the accounts receivable is 10,000 hours.

Hence the capacity cost rate.

……(1)

(b)

The activity based cost measures the relationship of the demand for the activity and other related cost. It is essential for decision making purpose.

As given the manual processing of invoice and cash receipt is 10hours,

manual processing of invoice and cash receipt is1.0 hour,

electronic processing of invoice and electronic funds transfer is 0.1 hour,

maintaining customer file is 0.5 hour,

small to medium sized customers is 1,000,

Invoice is 4,000.

calculation of activity based cost.

Calculation of Activity Based cost with division 1:

(c)

As given that the number of large customers is 200 and invoice is 400

Calculation of activity based cost with division 2:

(d)

As given that accounts receivable labor required is 1000 customers,

Manual invoices is 2,000,

Electronic invoice = 2,000

Now calculate customer change in division 1.

Calculation Division 1 customer change .

……(2)

The calculated value for capacity cost rate is $50 hours(refer equation (1)).

The calculated value for division 1 customer change is 2,700 hours (refer equation (2)).

Now calculate activity based cost.

The new Activity Based Cost is

The cost of Z company will not decrease because of the shift to 50% of electronic invoicing in division1. When the total resource costs decrease, Z’s costs would also decrease.