Entertainment Ltd$.$ was established two years ago to capitalise on a market opportunity created by consumer nostalgia for old television programs of Irish interest. The company buys the rights to such programs from their original producers and then distributes them through three distribution channels:

$$E$-$DVD$($a DVD manufacturing and distribution operation$)$;

$$Celtic Net TV$($a subscription$-$based TV service operated by Entertainment Ltd$.)$;

$$E$-$Licence$($which sells licences to terrestrial broadcasters who wish to show some programs owned by Entertainment Ltd$).$

Although each distribution channel has its own separate facilities $($and related costs$)$ the vast majority of Entertainment Ltd$$s costs are incurred at corporate headquarters. The following is a summary of costs in a typical year:

$$ Costs incurred at each distribution channel$$s facilities:

E$-$DVD Celtic Net TV E$-$Licence

Fixed operating costs K$600,000$ per annum K$1,000,000$ per annum K$400,000$ per annum

Variable costs K$1\mathrm{.}50$ per DVD NIL NIL

E$-$DVD produces and sells $800,000$ DVDs in a typical year.

$$ Costs incurred at corporate headquarters:

Cost of acquiring programs K$3,000,000$

Staff costs K$5,000,000$

Occupancy costs K$4,000,000$

Total K$12,000,000$

The company is keen to gain a more thorough knowledge of the costs associated with each distribution channel.

The following additional information was obtained:

$$ As well as program acquisition, four main activities are performed at headquarters $($editing; technical support; design; and administration$).$ Analysis of staff time sheets and building utilisation records indicate that staff and occupancy costs should be apportioned between these activities as follows:

Editing Technical support Design Administration

Staff costs $30\%20\%25\%25\%$

Occupancy costs $10\%10\%20\%60\%$

$$ Measures of the amounts of editing, technical support, and design activity $($but not administration$)$ are also available. Most activity is carried out at the request of specific distribution channels, but there is also a significant amount of $$general$$ activity $($e$.$g$.$ editing work which is necessary in order to make programs suitable for distribution through any channel$)$:

Editing hours Technical support hours Design hours

For: E$-$DVD $2,00080010,000$

For: Celtic Net TV $1,80075015,000$

For: E$-$Licence $2,7006005,000$

$$General$$ activity $3,00065011,000$

Total activity $9,5002,80041,000$

REQUIRED:

$($a$)$ Calculate cost driver rates for editing, technical support, and design activities. $(5$ marks$)$

$($b$)$ Use activity$-$based costing to determine the total costs associated with each distribution channel, insofar as is possible from the data provided. Also, indicate the total amount of cost which cannot be traced to any distribution channel.

$(9$ marks$)$

$($c$)$ Do you agree that, given the large amount of cost which cannot be traced to any distribution channel, your answers to parts $($a$)$ and $($b$)$ are of little real value to the management of Entertainment Ltd$.?$ Justify your answer.

$(6$ marks$)$