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

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

Allocation of costs to the activity cost pools

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

Activity rates for the activity cost pools

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

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.