Chapter 5A, Problem 5A.1E

Time-Driven Activity-Based Costing LO5—6

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:

Required:

Calculate the cost per minute of the resource supplied in the Purchasing Department.

Calculate the time-driven activity rate for each of Saratoga’s three activities.

Calculate the total purchasing labor costs assigned to Job X, Job Y, and Job Z.

To determine

Concept introduction:

Activity-based costing (ABC):

Activity-based costing refers to the method of costing where the overhead cost is assigned to various products. This costing method identifies the relationship between the manufacturing overhead costs and the activities. After establishing the relationship, the indirect cost is allocated to the products.

The cost per minute of the resource supplied.

Answer to Problem 5A.1E

The cost per minute of the resource supplied is 0.40.

Explanation of Solution

Determine the cost per minute of the resource supplied:

  $\begin{array}{c}\text{Cost per minute of the resource supplied = }\frac{\text{Total cost of resources supplied (1)}}{\text{Practical capacity of resources supplied (3)}}\\ =\frac{\$336,000}{848,640}\\ =\text{ \$0}\text{.40}\end{array}$

Thus, the cost per minute of the resource supplied is 0.40.

Working note 1:

Calculate the total cost of resources supplied:

  $\begin{array}{c}\text{Total cost of resources supplied = Number of employees }\times \text{ Average salary per employee}\\ \text{= 12 }\times \text{ \$28,000}\\ \text{= \$336,000}\end{array}$

Working note 2:

Calculate the capacity per employee:

  $\begin{array}{c}\text{Capacity per employee = Employment weeks }\times \text{ Working hours }\times \text{ 60 }\times \text{ Capacity percentage}\\ \text{= 52 }\times \text{ 40 }\times \text{ 60 }\times \text{ 85\%}\\ \text{= 106,080}\end{array}$

Working note 3:

Calculate the practical capacity of resources supplied:

  $\begin{array}{c}\text{Practical capacity of resources supplied = Capacity per employee (2) }\times \text{ Number of employee}\\ \text{= 106,080 }\times \text{ 8}\\ \text{= 848,640}\end{array}$

To determine

Concept introduction:

Activity-based costing (ABC):

Activity-based costing refers to the method of costing where the overhead cost is assigned to various products. This costing method identifies the relationship between the manufacturing overhead costs and the activities. After establishing the relationship, the indirect cost is allocated to the products.

To Calculate: The time-driven activity rate for the given activities.

Answer to Problem 5A.1E

The time-driven activity rate is $6, $18 and $12 for requisition processing,bid evaluation, and inspection.

Explanation of Solution

Calculate the time-driven activity rate for the given activities:

Particulars	Requisition Processing	Bid Evaluation	Inspection
Minutes per unit of the activity (a)	15	45	30
Cost per minute of the resource supplied (b)	$0.40	$0.40	$0.40
Time-driven activity rate (a × b)	$6.00	$18.00	$12.00

Table: (1)

Thus, the time-driven activity rate is $6, $18, and $12 for requisition processing,bid evaluation, and inspection.

To determine

Concept introduction:

Cost allocation:

 

Costallocation refers to the process where the common cost of the production and service rendered to the various departments of the business are distributed. It is used to calculate the actual cost attributed to a specific department.

The purchasing labor cost for Job X, Job Y, and Job Z.

Answer to Problem 5A.1E

The total cost of Job X, Job Y, and Job Z is $102, $162 and $168 respectively.

Explanation of Solution

Determine the purchasing labor cost for Job X, Job Y, and Job Z:

Particulars	Job X	Job Y	Job Z
Requisition processing costs	$48	$30	$24
Bid evaluation costs	$54	$36	$72
Inspection costs	$72	$24	$72
Total costs	$174	$90	$168

Table: (2)

Thus, the total cost of Job X, Job Y, and Job Z is $102, $162 and $168 respectively.

Working note 1:

Calculate the requisition processing costs:

Particulars	Time-driven activity rate(a)	Number of requisitions processed(b)	Requisition processing costs(c = a × b)
Job X	$6.00	8	$48.00
Job Y	$6.00	5	$30.00
Job Z	$6.00	4	$24.00

Table: (3)

Calculate the bid evaluation costs:

Particulars	Time-driven activity rate(a)	Number of bid evaluations(b)	Bid evaluation costs(c = a × b)
Job X	$18.00	3	$54.00
Job Y	$18.00	2	$36.00
Job Z	$18.00	4	$72.00

Table: (4)

Calculate the bid inspection costs:

Particulars	Time-driven activity rate(a)	Number of inspections(b)	Inspection costs(c = a × b)
Job X	$12.00	6	$72.00
Job Y	$12.00	2	$24.00
Job Z	$12.00	6	$72.00

Table: (5)