NEED PEER RESPONSE:
ORIGINAL QUIESTON:
In your readings this module, you were introduced to Activity-Based Costing or ABC. It is a method used to determine a reliable predetermined benchmark for the allocation of overhead costs to the products produced based on their activity levels. In this discussion, we will work a case study on ABC together. For your initial response, attempt to answer the questions yourself and post all the required items into the Discussion Area. You may want to post some elements during different days so the class can work this problem together. Then in your response postings, help each other with misunderstandings or miscalculations.
Tasks:
Merit-o-cracy PLC is a specialist advertising agency. It has been long-established but is experiencing difficulties in winning new business. The Chief Executive believes that its pricing methods are leading to the loss of large customer advertising campaigns while it is consistently winning smaller business.
Merit-o-cracy costs work for pricing purposes on the basis of direct advertising costs (i.e. space or time purchased from newspapers, radio and TV) plus 100%. The 100% is intended to cover all the overheads of the business, which run at $2 million per year. It does not include any profit margin. This budget cost comprises:
Creative staff $500,000
Production staff $750,000
Administrative & support staff $300,000
Rental and associated costs $450,000
Merit-o-cracy classifies its advertising campaigns as either small or large. Of the 350 campaigns the agency wins, about 325 are classified as small. A typical small advertising campaign incurs direct advertising costs of $4,000 each (and therefore is allocated $4,000 of overheads under current methods). The other 25 advertising campaigns are large and incur direct advertising costs of $28,000 each.
Merit-o-cracy’s accountant has heard of activity-based costing. After speaking to the management team, she has gathered information on the most common causes of costs. She believes that creative staff costs are linked to the number of advertising campaigns the agency competes for. Production staff costs are related to the number of advertising campaigns the agency wins. Administrative and support staff costs are related to the number of customers the agency has. Rental and associated costs are people-based and as a similar number of staff is employed in each of the three departments, the costs should be equally shared.
The accountant has also collected data on the activity levels in each of the three departments over the budget period. These are:
Creative
Production
Admin & support
STUDENT RESPONSE:
ABC or Activity-Based Costing
Cost for large campaigns: 325000 + 64286 + 112500 = $501786
Small campaigns = (400/ 800 * 650000) = $325000
Large campaigns = (400/ 800 * 650000) = $325000
Production Staff: $750000 + $150000 = $900000
Small campaigns = (325/ 350 * 900000) = $835714
Large campaigns = (25/ 350 * 900000) = $64286
Administration &support staff: $300000 + $150000 = $450000
Small campaigns = (300/ 400 * 450000) = $337500
large campaigns = (100/ 400 * 450000) = $112500
Meaning that, for small advertisement= 0.125 X $500000=$62500
For large advertisement = 0.875 X $500000 = $437500
The large advertisement that were successful, =25/400 X $437500 = $27343.75
The small advertisement that were successful, = 325/400 X $62500 = $50781.25
Total creative staff overhead = ($27343.75+ $50781.25) = $78125
Production staff = $750000
Rental and associated costs = $450,000
Administrative & support staff =$300,000
The advertising costs =$2000000
Large campaign: ((700000 – 501786) / 700000) * 100% = -28.32%
Reference
Cokins, G. (2001). Activity-based cost management: An executive’s guide. New York: Wiley.
Hicks, D. T. (2002). Activity-based costing: Making it work for small and mid-sized companies.
Horngren, C. (2017). Cost accounting. [S.l.]: Pearson.
NEED PEER RESPONSE: