Discussion: Please Read. It's Only For Answering Questions

Discussion Please Read Its Only Answering The Questions

Analyze a case study involving an advertising agency, Merit-o-cracy PLC, to apply activity-based costing (ABC). The task involves calculating the overhead allocated to small and large campaigns under existing methods, determining the cost per driver for each activity, and using these to compute activity-based overheads. Also, evaluate the percentage increase to the direct advertising costs needed to recover overheads using ABC.

Specifically, you will be provided with details about the company's costs, campaign classifications, and activity data across departments such as Creative, Production, and Administrative & Support. Use this data to perform a series of calculations: allocate existing overheads, derive cost drivers from activity levels, determine activity-based overheads for small and large campaigns, and calculate the increase needed in the current pricing method.

Paper For Above instruction

In contemporary managerial accounting, activity-based costing (ABC) is recognized as a more precise method of allocating overhead costs than traditional volume-based approaches. This case study of Merit-o-cracy PLC demonstrates the practical application of ABC methods in an advertising agency, illustrating how cost management and pricing strategies can be refined through detailed analysis of activities and cost drivers.

Merit-o-cracy PLC is a well-established advertising agency specializing in both small and large campaigns. Traditionally, the firm's overheads have been allocated using a simplistic approach—doubling direct advertising costs—which does not accurately reflect the actual resource consumption of each campaign. This method results in potential mispricing, especially disadvantaging larger campaigns due to their higher resource demands. Recognizing this, the company's accountant investigates ABC as a tool to improve cost accuracy and pricing decisions.

Initial calculations under the existing methods reveal that the total overheads of $2 million are allocated evenly based on direct advertising costs. Small campaigns, with an average cost of $4,000, are fully allocated $4,000 of overheads each, while large campaigns, costing $28,000, are allocated $28,000 each. Given the number of campaigns, this approach oversimplifies the complexity and diversifies actual resource use across different activities.

Applying ABC involves identifying the primary activities and their respective cost drivers. According to the data, creative staff costs ($500,000) are linked to the number of bids made, regardless of whether the campaign is won or lost. Production staff costs ($750,000) are associated with the campaigns the agency secures, and administrative & support staff costs ($300,000) correlate with the number of customers served. Rental and associated costs ($450,000) are distributed equally among departments, signifying a shared resource pool.

Based on the activity data, the agency bids on 800 campaigns (400 small and 400 large), wins 350 campaigns (325 small and 25 large), and serves 400 customers, with 300 having small campaigns and 100 large. This detailed activity information allows for calculations of cost per activity driver. For example, the creative department's cost driver is the number of bids, resulting in a rate of $500,000 / 800 bids = $625 per bid. The production department's rate, based on the 350 campaigns won, is $750,000 / 350 = approximately $2,142.86 per campaign. For admin & support, $300,000 / 400 customers = $750 per customer. Rental costs are common and split evenly, giving $150,000 per department.

Using these rates, the ABC overhead for each campaign type is calculated. Small campaigns involve 400 bids, 325 campaigns won, and 300 customers, translating into specific activity costs based on the activity drivers:

• Creative: 400 bids * $625 = $250,000
• Production: 325 campaigns * $2,142.86 ≈ $697,143
• Admin & Support: 300 customers * $750 = $225,000
• Rental & Associated: $150,000 (shared equally)

Similarly, for large campaigns, the activity counts are 400 bids, 25 campaigns won, and 100 customers, leading to activity costs such as:

• Creative: 400 bids * $625 = $250,000
• Production: 25 campaigns * $2,142.86 ≈ $53,571
• Admin & Support: 100 customers * $750 = $75,000
• Rental & Associated: $150,000

Aggregating these activity costs, the total activity-based overhead for small campaigns is approximately $1,372,143, and for large campaigns approximately $528,571. When divided by the respective number of campaigns, the cost per campaign is roughly $4,224 for small and $21,144 for large campaigns, which significantly exceeds the allocations under the traditional method. This indicates that small campaigns are currently overcosted, and large campaigns might be undercosted, affecting pricing and profitability.

The final step involves calculating the percentage increase in the direct advertising cost to fully recover overheads using ABC. Given the total overhead is now allocated based on activity, and the current over/under-allocation is evident, the agency might determine the proportional increase needed. For instance, if the traditional method assigns $4,000 to small and $28,000 to large campaigns, but ABC suggests $4,224 and $21,144 respectively, the percentage increases differ, influencing pricing strategies.

In conclusion, implementing ABC provides a more detailed understanding of resource consumption of campaigns, leading to more accurate pricing and better strategic decisions. This detailed analysis highlights how activity-based costing can uncover the true costs of campaigns, guiding the agency in setting competitive yet profitable prices, especially for larger campaigns that may currently be undervalued under conventional costing.

References

• Create your own APA style references for scholarly articles, textbooks on ABC, or credible industry sources, formatted properly. Examples include:
• Kaplan, R. S., & Anderson, S. R. (2004). Time-driven activity-based costing. Harvard Business Review, 82(11), 131-138.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial accounting (16th ed.). McGraw-Hill Education.
• Drury, C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning.
• Horngren, C. T., Datar, S. M., Rajan, M. V., & Kostner, C. (2015). Cost accounting: A managerial emphasis (14th ed.). Pearson.
• Kaplan, R. S., & Atkinson, A. A. (1998). Advanced Management Accounting. Pearson Education.
• Cooper, R., & Kaplan, R. S. (1991). Profit priorities from activity-based costing. Harvard Business Review, 69(3), 130–135.
• Horngren, C. T., Datar, S. M., & Rajan, M. (2012). Cost accounting: A managerial emphasis (14th ed.). Pearson.
• Noreen, E., Brewer, P. C., & Garrison, R. H. (2014). Managerial accounting (15th ed.). McGraw-Hill Education.
• Blocher, E. J., Stout, D. E., Juras, P. E., & Cokins, G. (2019). Cost Management: A Strategic Emphasis (8th ed.). McGraw-Hill Education.
• Harvard Business Review articles on activity-based costing and strategic pricing.