Asia Aerials (AA) manufactures satellite dishes for receiving satellite television signals. AA supplies the major satellite TV companies that 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 program of cost reduction at AA. 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 analyzed 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 in customer care. The cost accountant has gathered the 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. AA Dishes (information for the year ending 31 March 2021) 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     Additional Information 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 inquiries and preparing quotes for potential orders 40% relates to 35,000 inquiries/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   Total department cost is allocated using staff time as this drives all of the other costs in the department. 90% of both inquiries and orders are for standard dishes. The remainder is for specialized dishes. Handling inquiries and preparing quotes for specialized dishes takes 20% of staff time allocated to this activity. 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. 50% of the complaints received are for specialized dish orders. Each standard dish order contains an average of six dishes. Each specialized dish order contains an average of one dish. Table 3: Activity-based costs   Total $ Standard $ Specialized $ 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     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 AA.   Required: 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.   Assess how the information on each activity can be used and improved upon at AA in assisting cost reduction and quality management in the customer care department.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Asia Aerials (AA) manufactures satellite dishes for receiving satellite television signals. AA supplies the major satellite TV companies that 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 program of cost reduction at AA. 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 analyzed 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 in customer care. The cost accountant has gathered the 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.

AA Dishes (information for the year ending 31 March 2021)

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

 

 

Additional Information

  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 inquiries and preparing quotes for potential orders

40%

relates to 35,000 inquiries/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

 

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

Table 3: Activity-based costs

 

Total $

Standard $

Specialized $

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

 

 

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 AA.

 

Required:

  • 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.

 

  • Assess how the information on each activity can be used and improved upon at AA in assisting cost reduction and quality management in the customer care department.
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