SatComm $($Pvt$)$ Ltd $($SatComm$)$ is a manufacturer of satellite equipment. SatComm$$s customer base

comprises mainly major satellite TV companies who install standard satellite dishes for their customers.

In addition, the company also manufactures and installs a small number of specialized satellite dishes for

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 SatComm. His plan

is to use activity$-$based costing $($ABC$)$ to allocate costs more accurately and to identify non$-$value adding

activities. The first department to be analyzed is the Sales Care $($SC$)$ 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.

Under the current system of costing, the chief financial officer $($CFO$)$ absorbs the cost of SC into the

product cost on a per unit basis using the data in Table $1.$ In order to $$fix$$ the problem of unrealistic

costing, he adds an additional $$100$ above the standard absorbed cost to cover the assumed additional cost

of the SC department attributable to specialized dishes. These numbers are based on rough estimates

derived through discussions with the Head of Operations as to the amount of work of the department.

The cost accountant has gathered information for the SC department from interviews with the finance and

SC staff. She has used this information to correctly calculate the total costs of each activity cost pool

using activity$-$based costing in Table $2.$ 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 costs of each

activity in the SC department. The CEO is especially interested in how this information may impact on

the identification of non$-$value$-$added activities at SatComm.

Table $1$: Existing costing data

$

Salaries $500,000$

Computer Time $206,250$

Telephone $98,750$

Stationaries & Sundries $33,750$

Depreciation of Equipment $45,000$

Total Sales Care Department Cost $883,750$

Note: SC cost is currently allocated to each dish based on $16,000$ orders a year, where each order contains

an average of $5\mathrm{.}5$ dishes.

$3$

Table $2$: Activity$-$costing data

Activities of SC department Activity Cost Pool $($$$)$ Activity Measure

Handling enquiries and preparing

quotes for potential orders

$353,500$ Relates to $35,000$ enquiries$/$quotes

per year

Receiving actual orders $88,375$ Relates to $16,000$ orders in the year

Customer credit checks $88,375$ Done once an order is received

Supervision of orders through

manufacture to delivery

$132,563$

Complaints handling $220,938$ Relates to $3,200$ complaints per

year

Total Sales Care Department Cost $$883,750$

Notes:

$1.$ Total department cost is allocated using staff time as this drives all of the other costs in the department.

$2.90\%$ of actual orders are for standard dishes. The remainder are for specialized dishes.

$3.$ Handling enquiries and preparing quotes for specialized 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 specialized dish order and a standard dish order.

$5.50\%$ 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.

Required:

a$.$ Compute the Sales Care department cost allocated to each Standardized and Specialized satellite

dish using the current traditional absorption costing approach. $(3$ marks$)$

b$.$ Compute the activity rates for each activity in the Sales Care department using activity$-$based

costing. $(3$ marks$)$

c$.$ Compute the Sales Care department cost assigned to each Standardized and Specialized satellite

dish using the activity$-$based costing approach. $(7$ marks$)$

d$.$ In the context of the SatComm$$s Sales Care department and using your results from parts $($a$)-($c$),$

discuss how the activity$-$based costing changes the way costs are allocated to the Standardized

and Specialized satellite dish compared to the traditional absorption costing method. Your points

must be linked to the case at hand supported with calculations. $(5$ marks, total of $5$ discussion

points, each supported with a relevant calculation$)$

e$.$ Should the results of the ABC analysis impact the pricing strategy of the standard and specialized

dishes at SatComm? Support your conclusion with three reasons. $(4$ marks$)$

f$.$ Based on your computations in part $($b$),$ identify and evaluate the Sales Care department's

activities for potential non$-$value$-$added processes