Nevada Aerials Co (Nevada) 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 specialised satellite dishes to individuals or businesses with specific needs resulting from poor reception in their locations.

The CEO wants to initiate a programme of cost reduction at Nevada. His plan is to identify non-value adding activities. The company is currently using activity-based costing to calculate cost. The first department to be analysed is the customer care department, as management believe that the costs of this department are too high. The costs for the most recent year from the existing accounting system are shown in Table 1.

Table 1: Existing cost data

	$000
Computer time	165
Telephone	79
Stationary and sundries	27
Depreciation and equipment	36
	707

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.

Table 2: Activity-based data

Activities of department	Staff time	Total cost % ($)	Comments
Handling enquiries and preparing quotes for potential orders	40%	282,800	relates to 35,000 enquiries/orders
Receiving actual orders	10%	70,700	relates to 16,000 orders
Customer credit checks	10%	70,700	done once an order is received
Supervision of orders through manufacturing to delivery	15%	106,050
Complaints handling	25%	176,750	relates to 3,200 complaints
		707,000

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 Nevada.

Required:

1. What does the CEO means by stating his plan to identify non-value adding activities, when the company using activity-based costing to calculate cost? Explain.

2. What are the benefits of implementing the management method chosen above?

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