Snow Technology produces transmissions for snowmobiles. Because of competitive pressures, the company was making an effort to reduce costs. As part of this effort, management implemented an activity-based management system and began focus- ing its attention on processes and activities. Purchasing was among the processes (activities) that were carefully studied. The study revealed that the number of purchase orders was a good driver for purchasing costs. During the last year, the company incurred fixed purchasing costs of $252,000 (salaries of six employees). These fixed costs provide a capacity of processing 28,800 orders (4,800 per employee at practical capacity). Management decided that the value-added standard number of purchase orders is 14,400. The actual orders processed in the most recent period were 27,600.
Required
1. Calculate the activity volume and unused capacity variances for the purchasing activity. Explain what each variance means.
2. Prepare a report that presents value-added, non-value-added, and actual costs for purchasing. Explain why highlighting the non-value-added costs is important.
3. Explain why purchasing would be viewed as a value-added activity. List all possible reasons. Also, list some possible reasons that explain why the demand for purchasing is more than the value-added standard.
4. Assume that management is able to improve the purchasing activity and reduce the demand for purchasing from 27,600 orders to 21,600 orders. What actions should now be taken regarding activity capacity management?