Question
Waratah Ltd manufactures electronic devices, including PDAs, MP3 and MP4 players, for home and business use. Three years ago, it implemented an activity-based costing system.
Waratah Ltd manufactures electronic devices, including PDAs, MP3 and MP4 players, 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 the variety of decisions. However, the ABC system focuses only on product design and manufacturing costs. The activity-based costs of Waratahs major products are as follow:
Activity | PDA Basic | PDA+ | PDA/Phone |
Designing | $ 100 | $110 | $125 |
Purchasing | 150 | 95 | 130 |
Assembling | 890 | 1200 | 1400 |
Finishing | 260 | 250 | 250 |
Total activity cost | $1,400 | $1,655 | $1,905 |
In July, Hannah Allen, 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 months cost had been 20 per cent above budget! The customer support supervisor, Bill Dominico, 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 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 customer 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 companys success.
Hannah asks Bill if she can have success to have access to the records of his department for the past three months (june quater). 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 quater. The analysis reveals the following data:
Note: Total activity cost is per unit
The cost of selling and customer support activities, and selling price for each product, are as follow:
PDA Basic | PDA+ | PDA/Phone | |
Activities: | |||
Selling | $39,000 | $33,750 | $9,000 |
Customer support | 78,300 | 123,750 | 20,200 |
Selling price per unit | $2,000 | $2,600 | $2,800 |
The companys customers can be analysed into three main groups; educational instructions business and home entertainment. The sales to these groups during the June quarter are detailed below:
Customer groups | PDA Basic | PDA+ | PDA/Phone |
Educational Institutions | 150 | 40 | 5 |
Business | 20 | 30 | 30 |
Home entertainment | 130 | 80 | 5 |
Total Sales | 300 | 150 | 40 |
- The costs of customer support and selling activities for each customer group are as follows:
Educational | Business | Home entertainment | |
Selling expenses | $28,000 | $25,750 | $28,000 |
Customer support | 86,000 | 49,750 | 86,500 |
Note: the total sales for Customer groups during June quarters is in units.
Question
Explain the types of performance measure that could be introduced by Waratah to assist in understanding and managing their customers.
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