Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 55

ABC Data, Capacity-Resource Planning, Nonfinancial Performance Indicators National Computer (a fictitious company) competes at the retail level on the basis of customer service. It has invested significant resources in its Customer Service Department. Recently, the company has installed a tra­ditional activity-based costing (ABC) system to provide better-quality cost information for pricing, decision making, and customer-profitability analysis. Most of the costs of running the Customer Service Department are considered committed (i.e., short-term fixed) costs (principally, personnel and equipment costs). The budgeted cost for the upcoming period is $1 million. Activity analysis, recently conducted when the ABC system was implemented, revealed the following information:

Activities	Percentage of Employee Time	Estimated (Budgeted) Cost-Driver Quantity
Handling customer orders	80%	8,000 customer orders
Processing customer compla ints	10	400 customer complaints
Conducting customer credit checks	10	500 credit checks

Required

1. Based on the preceding information, calculate the activity-cost driver (ABC) rates for each of the three activities performed by the Customer Service Department. Assume that during the period actual cost-driver activity levels are exactly as planned. Under this situation, what is the total cost assigned to each of the three activities? For each activity, what is the cost of unused capacity?

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2. Suppose that during the upcoming period, activities (i.e., cost-driver quantities) are exactly as budgeted. Suppose, too, that the practical capacity level for each of these activities is 10,000 customer orders, 500 customer complaints, and 500 credit checks. Using cost-driver rates based on practical capacity levels for each activity, what is the cost assigned to each of the three activities? Also, what is the unused capacity and the associated cost of unused capacity for each activity?

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3. What actions might the management of National Computer take in response to the analysis conducted in response to (2) above?

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4. What nonfinancial performance indicators do you recommend National Computer monitor in terms of its Customer Service Department? In general, how are these indicators chosen? (That is, how do you justify the items you are recommending?)

Step 1 of 5

Activity based costing (ABC) will enable in assigning overhead and other indirect cost to products and services of the concerned company. Activity based costing (ABC) is activity based such as unit of produce or services.

Therefore, such activities are considered as cost drivers. And thus, overhead and indirect costs are divided by cost driver and assigned to charge respective activities.

Such activity based application to assign overhead cost is narrated in the form of statement in Excel spread sheet as under.