Assignment M5

ABC or Activity-Based Costing 4

Activity Based Costing in Merit-o-cracy PLC Case Study

The amount of overhead allocated to small and large advertising campaigns under existing methods

Since the existing methods allocate overheads based on direct advertising costs;

Overhead allocated to small = (325*$ 4000 each)

= $ 1,300,000

Overhead allocated to large advertising campaigns = (25*$ 28,000 each)

= $ 700,000

Apply activity-based costing to calculate the cost per cost driver for each of the cost pools

Cost pools

Creative staff $500,000

Production staff $750,000

Administrative & support staff $300,000

Rental and associated costs $450,000

Total overhead cost $ 2,000,000

Activity Cost Pool	Activity Measures
Creative	agency bids
Production	Agency wins
Admin & support	Agency services

Distribution of Resource Consumption Across Activity
	Creative bids	Production wins	Admin & support services	Total
Small campaigns	400	325	300	1025
Large campaigns	400	25	100	525
Total activity	800 bids	350 wins	400	—

Allocation of costs to the activity cost pools

Distribution of Resource Consumption Across Activity
	Creative bids	Production wins	Admin & support services	Total
Small campaigns	$ 250,000	$696,428.60	$225,000	1, 171, 428.60
Large campaigns	$ 250,000	$53, 571.40	$ 75,000	378,571.40
Other cost	150,000	150,000	150,000	450,000
Total cost	$ 650,000	$ 900,000	$ 450,000

N/B; Rental and associated costs $450,000/3 = 150,000

Activity rates for the activity cost pools

Activity Cost Pools	Total Cost	Total Activity	cost per cost driver
Creative	$650,000	8,00 bids	$812.50 per bid
Production	$900,000	350 wins	$2,571 per win
Admin & support	$450,000	400 services	$1,125 per service

Using costs per cost driver to get activity-based overhead applicable to small and large campaigns.

	Creative	Production	Admin & support services	Total
Small campaigns	$ 325,000	$835,575	$337,500	1, 498, 075
Large campaigns	$ 325,000	$64, 275	$ 112,500	501, 775
Total cost	$ 650,000	$ 899,850	$ 450,000	1,999,850

The percentage to be added to direct advertising costs to recover overhead costs under activity-based costing

In small campaigns the % to be added will be = (1, 498, 075 – 1, 300, 000)/1,300,000

= 15 %

Large campaigns are overvalued under the existing approaches

References

Drury, C. (1992). Activity-based costing. In Management and Cost Accounting (pp. 273-288). Springer US

Turney, P. B. (1992). Activity based costing. Management Accounting Handbook”(4 th Edition), edited by C. Drury, Butterworth-Heinemann and CIMA.

Cooper, R. (1992). Activity-Based Costing. In Handbuch Kostenrechnung (pp. 360-383). Gabler Verlag.