Question 2b
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 |
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.
| 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:
(b) Assess how the information on each activity can be used and improved upon at Navier in assisting cost reduction and quality management in the customer care department.
Note: There is no need to make comments on the different product types here. (12 marks)