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