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 specialized 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 specialized 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 specialized 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) Customer care (CC) department Table 1: Existing costing data

.........................................................$000Salaries ............................................400Computer time ...............................165Telephone ..........................................79Stationery and sundries ...................27Depreciation of equipment .............36...........................................................707

(i) 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

1. Total department cost is allocated using staff time as this drives all of the other costs in the department.2. 90 percent of both enquiries and orders are for standard dishes. The remainder are for specialized dishes.3. Handling enquiries and preparing quotes for specialized dishes takes 20 percent 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 specialized dish order and a standard dish order.5. 50 percent of the complaints received are for specialized dish orders.6. Each standard dish order contains an average of six dishes.7. Each specialized dish order contains an average of one dish.

Table 3: Activity-based costs

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.(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.There is no need to make comments on the different product types here.

Transcribed Image Text:

Activities of CC dept Staff time Comments Handling enquiries and preparing quotes for potential orders 40% relates to 35000 enquiries/quotes per year 10% relates to 16000 Receiving actual orders orders in the year Customer credit checks 10% done once an order is received Supervision of orders through manufacture to delivery Complaints handling 15% 25% relates to 3200 complaints per year Total Standard Specialized 282 800 226240 56560 Handling enquiries and preparing quotes Receiving actual orders 70700 63630 7070 Customer credit checks 70700 63630 7070 Supervision of order through 106050 manufacture to delivery Complaints handling 95445 10605 176750 88375 88375 Total 707 000 537 320 169 680