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.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
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
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 |
|
|
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
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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