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

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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.




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