Pixel Studio, Inc., is a small company that creates computer-generated animations for films and television. Much of the companys work consists of short commercials for television, but the company also does realistic computer animations for special effects in movies.

The young founders of the company have become increasingly concerned with the economics of the businessparticularly since many competitors have sprung up recently in the local area. To help understand the companys cost structure, an activity-based costing system has been designed. Three major activities are carried out in the company: animation concept, animation production, and contract administration. The animation concept activity is carried out at the contract proposal stage when the company bids on projects. This is an intensive activity that involves individuals from all parts of the company in creating story boards and prototype stills to be shown to the prospective client. Once a project is accepted by the client, the animation goes into production and contract administration begins. Almost all of the work involved in animation production is done by the technical staff, whereas the administrative staff is largely responsible for contract administration. The activity cost pools and their activity measures are listed below:

These codes created some controversy. In particular, some administrators objected to coding their own salaries Yellow, while the technical staff salaries were coded Red. However, the founders of the firm overruled these objections by pointing out that our technical staff is our most valuable asset. Good animators are extremely difficult to find, and they would be the last to go if we had to cut back.