Chapter 10, Problem 43E

1.

To determine

Determine the budgeted resource cost per hour (at practical capacity) for each of the two resources, indirect support and computer support. 

Explanation of Solution

Given data

Activities:	Budgeted Unit Times  (Hours)
Handle production runs:
Indirect labor	10.00
Computer support	0.40
Product-level support:
Indirect labor	500.00
Computer support	50.00
Practical capacity (resources supplied), in hours/qtr.:
Indirect labor	20,000
Computer	500
Resource costs (per quarter):
Indirect labor	$10,00,000
Computer	$5,00,000
Actual activity consumption during the quarter:
Indirect labor hours used	18,000 hours
Computer hours used	450 hours

Calculate budgeted resource costs per hour (at practical capacity).

Resource	Budgeted costs	Practical capacity (Hours)	Budgeted cost per hour
Indirect labor support	$1,000,000	20,000	$50
Computer support	$500,000	500	$1,000

Note:$\text{Cost per hour = }\frac{\text{Budgeted costs}}{\text{Practical capacity }\left(\text{Hours}\right)}$

2.

To determine

Determine the cost – driver rates for each activity (handle production runs, and support products). 

Explanation of Solution

Activity 1: Calculate handle production runs.

Resource	Budgeted cost per hour	Unit times (hours)	Budgeted cost-driver rate
Indirect labor support	$50	10.00	$500.00
Computer support	$1,000	0.40	$400.00
			$900.00 per run

Note:

1. 1. $\begin{array}{l}\text{Budgeted cost}\\ \text{ - Driver Rate }\end{array}\}\text{ = }\left(\begin{array}{l}\begin{array}{c}\text{Budgeted}\end{array}\\ \text{Cost/Hour}\end{array}\right)\text{ × }\left(\begin{array}{l}\begin{array}{c}\text{Unit}\end{array}\begin{array}{c}\text{Times}\end{array}\\ \left(\text{hours}\right)\end{array}\right)$
2. 2. $\begin{array}{l}\text{Handle }\\ \text{production runs }\end{array}\}\text{= }\left(\begin{array}{l}\text{Budgeted cost-driver rate }\\ \text{of indirect labor support }\end{array}\right)+\left(\begin{array}{l}\text{Budgeted cost-driver rate }\\ \text{of computer support }\end{array}\right)$

Activity 2: Support Products

Resource	Budgeted cost per hour	Unit times (hours)	Budgeted cost-driver rate
Indirect labor support	$50	500.00	$25,000
Computer support	$1,000	50.00	$50,000
			$75,000 per product

Note:

1. 1. $\begin{array}{l}\text{Budgeted cost}\\ \text{ - Driver Rate }\end{array}\}\text{ = }\left(\begin{array}{l}\begin{array}{c}\text{Budgeted}\end{array}\\ \text{Cost/Hour}\end{array}\right)\text{ × }\left(\begin{array}{l}\begin{array}{c}\text{Unit}\end{array}\begin{array}{c}\text{Times}\end{array}\\ \left(\text{hours}\right)\end{array}\right)$
2. 2. $\begin{array}{l}\text{Support}\\ \text{Products }\end{array}\}\text{= }\left(\begin{array}{l}\text{Budgeted cost-driver rate }\\ \text{of indirect labor support }\end{array}\right)+\left(\begin{array}{l}\text{Budgeted cost-driver rate }\\ \text{of computer support }\end{array}\right)$

3.

To determine

Determine the cost of ideal capacity for the quarter by resource. 

Explanation of Solution

Resource	Cost of resource supplied	Resource units supplied	Resource units used	Cost of resources used	Cost of idle capacity
Indirect labor	$1,000,000	20,000	18,000	$900,000	$100,000
Computer support	$500,000	500	450	$450,000	$50,000

Note:

1. 1. $\text{Cost of resources used = Resource cost used }\times \text{Budgeted cost per hour}$
2. 2. $\text{Cost of idle capacity = Cost ofd resources used – Cost of resources supplied }$

In general, cost of idle capacity must not be assigned to the actual units produced or the served customer during the period. But, on the other hand, cost of idle capacity must not be ignored and becomes responsibility of some working in an organization. In an organization, cost of idle capacity for a particular period must be assigned to a person or office who becomes an authorized person during acquisition of a capacity. Thus, here, assignment is made on lump-sum basis and feedbacks are being provided on the basis of the assignment with respect to the resource supplies and the demand decisions.      

4.

To determine

Determine the post-TQM results.

Explanation of Solution

Efficiency gain is indirect labor consumed by "handling a production run" which is 10%

Original indirect labor hours: handling production runs =                16,000

Original indirect labor hours: computer support =                              2,000

Determine the revised budgeted cost-driver rate: indirect labor support for ‘handling a production run”:

Resource	Budgeted cost / hour	Unit Times (hours)	Budgeted cost – Driver rate
Indirect labor	$50	9.00	$450.00 per run

Note: $\text{Budgeted cost - Driver Rate = Budgeted cost / hour }\times \text{ Unit Times }\left(\text{hours}\right)$

Determine the revised Cost of Idle Capacity--Indirect Labor Support Cost:

Resource	Cost of resource supplied	Resource units supplied	Resource units used	Cost of resources used	Cost of idle capacity
Indirect labor	$1,000,000	20,000	16,400	$820,000	$180,000

Working note: Calculate resource unit used.

$\begin{array}{c}\begin{array}{l}\text{Calculation of}\\ \text{ resource units used}\end{array}\}\text{ =}\left(\begin{array}{l}\text{ Original indirect labor}\\ \text{ hours: computer support }\end{array}\right)\text{+ }\left[\begin{array}{l}\left(\begin{array}{l}\text{Original indirect }\\ \text{labor hours}\\ \text{: handling production runs }\end{array}\right)\\ \times \left(1-10\%\right)\end{array}\right]\\ =2,000+\left(16,000\times \left(1–10\%\right)\right)\\ =16,400\end{array}$

Note:

$\begin{array}{c}\text{Cost of idle capacity = Cost of resource supplied – Cost of resource used }\\ \text{= \$1,000,000 – \$820,000}\\ \text{=\$180,000}\end{array}$

Efficiency gain is resulted in “freed-up” in the indirect labor resources. These are available for use in the company.  Management faces an issue towards reduction of the workforce. It reduces the cost – driver rate that are used for potential strategic use to the management for pricing and product promotion purposes.