Question

Pluto plc (Pluto) is a financial services institution which is organised into various departments along product based lines. The main products which Pluto sells are mortgages, loans and credit cards. Pluto has a customer relations department which deals only with any after-sales advice or problems concerning the above products. At a recent Board meeting, the cost of the customer relations department was a subject for discussion. One director highlighted that the cost of this department had increased over the previous few years and had risen by 10% in the last financial year alone. Basic salaries in the customer relations department amounted to $3,255,000 and overtime paid in the last financial year was an additional 22% of this amount. The Financial Director (FD) of Pluto asked, initially, for details of how staff are spending their time in the customer relations department. He then asked that all the costs of the customer relations department for the year be analysed by attributing the costs to the respective products which Pluto sells. He insisted that all costs must be attributed. The time spent by staff in the customer relations department is detailed below: 32% 5% 17% Customer Relations Department Customer complaints Product training Arranging and processing credit notes to customers Communication with other departments Account closures Customer defaults (non-payment) Correcting errors in original contract details 10% 13% 7%

Answer 1

Hasic salary Add: Overtime (22%) Total cost 3255000 716100 3921100 Loan 6 ,35,376 Customer Relations Department Customer complaints Product training Arranging and processing credit notes to customers Communication with other departments Account closures Customer defaults non-payment) Correcting errors in original contract details Total Total cost allocation Mortgage 12.70.752 3.81.226 1.99.555 1.98 555 6.75.087 1.68.772 3.97,110 1,32,370 5,16,243 1,03,249 2.77.977 3 .899 6.35.376 1.56.844 39,71,100 11,56,914 Credit Card Basis 2,54,150 % Riven - Training only tomartgage dept 3,37,544 % given 1,32,370 Equally divided 51.624 Time spent 41,695.55 Time spent - Time spent 8,17,385 1,68,772 1,32,370 3,61.370 2.22.382 4.76.532 19,96,801 13% 16% Additional information required for decision making: 1. Revenue earned by three departments 2. Number of customers of each department 3. Revenue per customer of each department

Hasic salary Add: Overtime (22%) Total cost 3255000 716100 3921100 Loan 6 ,35,376 Customer Relations Department Customer complaints Product training Arranging and processing credit notes to customers Communication with other departments Account closures Customer defaults non-payment) Correcting errors in original contract details Total Total cost allocation Mortgage 12.70.752 3.81.226 1.99.555 1.98 555 6.75.087 1.68.772 3.97,110 1,32,370 5,16,243 1,03,249 2.77.977 3 .899 6.35.376 1.56.844 39,71,100 11,56,914 Credit Card Basis 2,54,150 % Riven - Training only tomartgage dept 3,37,544 % given 1,32,370 Equally divided 51.624 Time spent 41,695.55 Time spent - Time spent 8,17,385 1,68,772 1,32,370 3,61.370 2.22.382 4.76.532 19,96,801 13% 16% Additional information required for decision making: 1. Revenue earned by three departments 2. Number of customers of each department 3. Revenue per customer of each department

3. Activity based management is a systematic integrated approach that describes management decision that use activity based costing information to satisfy customers and improve profitability. ABM focuses on accountability of activities. The ABM system will be useful to analyse various costs on the basis of activities done by them. This will enable them to identify problem areas and areas of particular strength. It will also help them more accurate budget and long term financial forecast.