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 |
| 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
| 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.