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Question 2a

Navier Aerials Co (Navier) manufactures satellite dishes for receiving satellite television signals. Navier supplies the major satellite TV companies who install standard satellite dishes for their customers. The company also manufactures and installs a small number of specialised satellite dishes to individuals or businesses with specific needs resulting from poor reception in their locations.

The chief executive officer (CEO) wants to initiate a programme of cost reduction at Navier. His plan is to use activity-based management (ABM) to allocate costs more accurately and to identify non-value adding activities. The first department to be analysed is the customer care department, as it has been believed for some time that the current method of cost allocation is giving unrealistic results for the two product types.

At present, the finance director (FD) absorbs the cost of customer care into the product cost on a per unit basis using the data in table 1. He then tries to correct the problem of unrealistic costing, by making rough estimates of the costs to be allocated to each product based on the operations director’s impression of the amount of work of the department.

In fact, he simply adds $100 above the standard absorbed cost to the cost of a specialised dish to cover the assumed extra work involved at customer care.

The cost accountant has gathered information for the customer care department in table 2 from interviews with the finance and customer care staff. She has used this information to correctly calculate the total costs of each activity using activity-based costing in table 3. The CEO wants you, as a senior management accountant, to complete the work required for a comparison of the results of the current standard absorption costing to activity-based costing for the standard and specialised dishes.

Once this is done, the CEO wants you to consider the implications for management of the customer care process of the costs of each activity in that department. The CEO is especially interested in how this information may impact on the identification of non-valued added activities and quality management at Navier.

Navier Dishes (information for the year ending 31 March 2013)
Customer care (CC) department

Table 1: Existing costing data
$’000
Salaries 400
Computer time 165
Telephone 79
Stationery and sundries 27
Depreciation of equipment 36
707

Note:


1 CC cost is currently allocated to each dish based on 16,000 orders a year, where each order contains an average of 5·5 dishes.

Table 2: Activity-costing data

Activities of CC dept Staff time Comments
Handling enquiries and preparing quotes for potential orders 40% relates to 35,000 enquiries/quotes per year
Receiving actual orders 10% relates to 16,000 orders in the year
Customer credit checks 10% done once an order is received
Supervision of orders through manufacture to delivery 15%
Complaints handling 25% relates to 3,200 complaints per year

Notes:
1. Total department cost is allocated using staff time as this drives all of the other costs in the department.
2. 90% of both enquiries and orders are for standard dishes. The remainder are for specialised dishes.
3. Handling enquiries and preparing quotes for specialised dishes takes 20% of staff time allocated to this activity.
4. The process for receiving an order, checking customer credit and supervision of the order is the same for both a specialised dish order and a standard dish order.
5. 50% of the complaints received are for specialised dish orders.
6. Each standard dish order contains an average of six dishes.
7. Each specialised dish order contains an average of one dish.

Table 3: Activity-based costs
Total Standard Specialised
$ $ $
Handling enquiries and preparing quotes 282,800 226,240 56,560
Receiving actual orders 70,700 63,630 7,070
Customer credit checks 70,700 63,630 7,070
Supervision of order through manufacture to delivery 106,050 95,445 10,605
Complaints handling 176,750 88,375 88,375
Total
707,000

537,320

169,680

Required:
(a) Evaluate the impact of using activity-based costing, compared to the existing costing system for customer care, on the cost of both types of product. (13 marks)