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 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 5.5 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. b. Compute the activity rates for each activity in the Sales Care department using activity-based costing. c. Compute the Sales Care department cost assigned to each Standardized and Specialized satellite dish using the activity-based costing approach. d. In the context of the SatComms 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. , 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.

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

activities for potential non-value-added processes.