Consider the following data for an accounts receivable (A/R) department:

The cost of operating the department is $8 million per year. The A/R department has 64 clerks, each of whom works about 130.21 hours per month, net of time off for vacations, holidays, sick leave, personal leave, work breaks during the day, and time consumed in meetings, training, and education.

The A/R clerks perform the following tasks:

1. Send invoices to customers each month

2. Receive, record, and deposit cash receipts

3. Maintain customer files (name, address, credit rating, payment history, outstanding invoices)

The TDABC project team, through direct observation, obtains the following data:

Manual processing of invoice and cash receipt1.0 hour

Electronic processing of invoice and cash receipt0.1 hours

Maintain customer credit file (annual)0.5 hours

Two divisions in the company each have $50 million in annual sales. Under a traditional cost-allocation system, corporate overhead would be allocated (arbitrarily) by the relative percentages of sales in the two divisions. In this case, with equal sales revenue, both divisions receive the same allocation of A/R costs (and of every other corporate-supplied service).

The TDABC team learns, however, that Division 1 generates about 1,000 electronic invoices per year for its 100 large wholesale customers (an average customer does about $500,000 of business per year), and all the customers pay electronically. Division 2, in contrast, has 6,000 small to medium-sized retail customers, requiring 20,000 manual invoices to be prepared annually. All of Division 2's customers pay by mailing in paper checks for each invoice.

(e) Use the time equation you constructed above to compute the costs you would assign to the two divisions separately using the TDABC model.

(f) Discuss the differences in assignment of costs between a traditional cost allocation method and a TDABC method using the above A/R department. What factors cause these differences to arise?

(g) It has been argued that the TDABC method enables one to compute the cost of unused capacity more effectively than the conventional ABC method. Explain why this is the case. Using the capacity cost rate you calculated above, illustrate (only in words and not numbers) how you would compute the cost of unused capacity.