CASE 3

MANAGING CUSTOMERS AT J-BIRD LTD.

J-Bird Ltd manufactures electronic devices, including Music players and smartphones, for home and business use. Three years ago, it implemented an activity-based costing system. Both the management accountants and the manufacturing managers are very pleased with the results, as they now have accurate product costing information that they can use for a variety of decisions. However, the ABC system focuses only on product design and manufacturing costs. The activity-based costs of J-Bird's major products are as follows:

Activity

X-1

X-2

X-3

Designing

$200

$220

$250

Purchasing

300

190

260

Assembling

1780

2400

2800

Finishing

520

500

500

Total activity cost

$2800

$3310

$3810

In July, Nadia, the assistant accountant, noticed that over the last six months the spending in both the Customer Support Department and the Sales Department had been steadily increasing. The previous month's costs had been 20 per cent above budget! The customer support supervisor, Francis, is able to explain exactly why this is happening. He has had to employ new staff, there is more overtime being worked, and some of the service calls have been outsourced to a third-party maintenance company. But all this was necessary, as he explains:

If a customer has a problem, we have to fix it! And if we have spent more than our budget, then that is just too bad. It is important to keep customers happy. Why, only the other day the managing director was telling us how important our customers are and how customer satisfaction is critical to the company's success.

Nadia asks Francis if she can have access to the records of his department for the past three months (June quarter). She intends to analyse the service calls to see exactly where the extra money is being spent. She also plans to analyse the selling expenses that have occurred during June quarter. The analysis reveals the following data:

The cost of selling and customer support activities, and selling price for each product, are as follows:

X-1

X-2

X-3

Activities:

Selling

$78 000

$67 500

$18 000

Customer support

156 600

247 500

40 400

Selling price per unit

4000

5200

5600

The company's customers can be analysed into three main groups: educational institutions, business and home entertainment. The sales to these groups during the June quarter are detailed below:

Customer groups

X-1

X-2

X-3

Educational institutions

300

80

10

Business

40

60

60

Home entertainment

260

160

10

Total sales

600

300

80

The costs of customer support and selling activities for each customer group are as follows:

Educational

Business

Home entertainment

Selling expenses

$56 000

$51 500

$56 000

Customer support

172 000

99 500

173 000

Required:

1)Prepare a report for management of J-Bird Ltd in which you:

a)Provide a quantitative analysis of the profitability of each product line and of each customer group;

b)Evaluate the profitability of the company's products and customers and draw out the key findings;

c)Propose a selection of performance measures that could be introduced by J-Bird to assist in understanding and managing their customers.

2)Drawing on your analysis above, but not limited by it, make a set of appropriately justified recommendations to management regarding ways of managing customers that would be beneficial to the company.

3)Discuss how accounting and performance measurement systems may create challenges to customer management. What recommendations would you make to their design to enable effective customer management?