The company for which you work recently implemented time-driven activity-based costing (TDABC) in conjunction with its ERP system. Management is pleased with the revised product and customer cost information that the TDABC system produces. It is now wondering how this system can be used for budgeting purposes. You have been asked to provide an example of using time-driven activity-based budgeting, given the following information:

1. There are two resources (departments): indirect labor and computer support.

2. There are two primary activities that these resources support: handling production runs and product-level support.

3. Indirect labor support is consumed as follows:

a. To handle production runs: 10 hours/run

b. To support products: 500 hours/product

4. Computer support is consumed as follows:

a. To handle production runs: 0.4 hr./run

b. To support products: 50 hours/product

5. Resource practical capacity levels:

a. Indirect labor: 20,000 hours per quarter

b. Computer support: 500 hours per quarter

6. Cost of supplying resources:

a. Indirect labor: $1,000,000 per quarter

b. Computer support: $500,000 per quarter

Required

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

2. Determine the budgeted cost-driver rates for each of two activities, handle production runs, and support products.

3. Suppose that the total cost of resources supplied for the quarter just ended was exactly as budgeted (i.e., $1,500,000), but that only 18,000 indirect labor hours were used along with 450 computer hours.

Calculate, for each resource, the cost of unused capacity. How should this cost be handled for internal reporting purposes?

4. After implementing a TQM program, the company was able to implement process-efficiency changes, the end result of which was a 10 percent reduction in the indirect labor time associated with the activity handling production runs. Re-estimate the indirect labor cost component of the cost to handle a production run. Also, recalculate the cost of unused capacity for indirect labor assuming the original facts but with the 10 percent efficiency gain. Assume that in the original case facts, 16,000 of the 18,000 hours related to the activity handling production runs (while the remaining 2,000 hours related to the activity support product).