Parker Toys produces a variety of handheld video games. Due to competitive pressures, the company was making an effort to reduce costs. As part of this effort, management imple¬

mented an activity-based management system and began focusing its attention on processes and activities. Purchasing was among the processes (activities) that was 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 $140,000 (salaries of four employees). The fixed costs provide a capacity of processing 16,000 orders (4,000 per employee at practical capacity). Management decided that the value-added standard num¬

ber of purchase orders is 8,000. The actual orders processed in the most recent period were 14,000.

Required:

1. Calculate the volume and unused capacity variances for the purchasing activity. Ex¬

plain what each variance means.

2. Prepare a report that presents value-added, nonvalue-added, and actual costs for pur¬

chasing. Explain why highlighting the nonvalue-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 de¬

mand for purchasing from 14,000 orders to 12,000 orders. What actions should now be taken regarding activity capacity management?