Alan Ray has worked hard to improve the process flow in his department. In charge of accounts payable, his department has 14 full time employees, each capable of delivering 1,800 hours of service per year. The total cost for Alan's department is $1,512,000 per year. This past year, Alan's department handled 80,000 payments, each of which consumed about 20 minutes. For the current year, Alan instituted some process improvements that halved the average time spent on each payment to 10 minutes.
Required:
a. What was the cost per payment during the past year and the current year? Perform these calculations assuming 80,000 payments as the volume of operations for both the past and the current year. Further, assume that there was no change in total costs and in staffing.
b. Repeat part (a) using practical capacity as the denominator volume to compute the rate.
c. Which of the two sets of calculations (part a or part b) better reflects Alan's cost management efforts?