Problem -
Headwind Suppliers Ltd. has been using a traditional activity-based costing (ABC) system. It is switching to time-driven activity-based costing. The current system assigns $2,000,000 of committed resource costs in the accounting department. There are 4,000 hours of useful work time available (practical capacity). Based on interviews with accounting personnel, the following information was gathered:
|
Activity
|
Time Percentage
|
Estimate Cost Driver
|
Quantity Unit Time in Hours
|
|
Processing sales orders
|
35%
|
5,000 sales orders
|
.2
|
|
Processing purchase orders
|
60%
|
10,000 purchase orders
|
.1
|
|
Processing payroll
|
5%
|
50 payroll periods
|
30
|
|
|
100%
|
|
|
Required:
a. Compute the cost driver rates and the costs assigned to each activity using traditional ABC.
b. Compute the time-driven ABC cost driver rates and the costs assigned to each activity.
c. Draw conclusions from the analyses.