A recent directive from Laura Jensen, CEO of Hermantown Manufacturing, had instructed each department to cut its costs by 15%. The traditional functional budget for the shipping and receiving department was as follows:

Salaries, four employees at $63,000 … $252,000

Benefits at 10% ………………………… 50,400

Depreciation, straight-line basis ……… 114,000

Supplies ………………………………… 65,100

Overhead at 35% of above costs ………. 168,525

Total ………………………………….. $650,025

Therefore, the shipping and receiving department needed to find $97,504 to cut.

Janice Starke, a recent MBA graduate, was asked to pare $97,504 from the shipping and receiving department’s budget. As a first step, she recast the traditional budget into an activity-based budget.

Receiving, 620,000 pounds ………. $139,500

Shipping, 404,000 boxes …………… 303,000

Handling, 11,200 moves ……………. 168,000

Record keeping, 65,000 transactions … 39,525

Total ……………………………… $650,025

1. What actions might Starke suggest to attain a $97,504 budget cut? Why would these be the best actions to pursue?

2. Which budget helped you most in answering number 1? Explain.