Product Costing: Department Versus ABC for Overhead

Advertising Technologies, Inc. (ATI) specializes in providing both published and online advertising services for the business marketplace.

The company monitors its costs based on the cost per column inch of published space printed in print advertising media and based on the cost per minute of telephone advertising time delivered on "The AD Line," a computer-based, online advertising service. ATI has one new competitor, Tel-a-Ad, in its local tele advertising market; and with increased competition, ATI has seen a decline in sales of online advertising in recent years. ATI's president, Robert Beard, believes that predatory pricing by Tel-a-Ad has caused the problem. The following is a recent conversation between Robert and Jane Minnear, director of marketing for ATI.

 Jane: I just received a call from one of our major customers concerning our advertising rates on "The AD Line" who said that a sales rep from another firm (it had to be Tel-a-Ad) had offered the same service at $1 per minute, which is $1.50 per minute less than our price. Robert: It's costing about $1.35 per minute to produce that product. I don't see how they can afford to sell it so cheaply. I'm not convinced that we should meet the price. Perhaps the better strategy is to emphasize producing and selling more published ads, which we're more experienced with and where our margins are high and we have virtually no competition. Jane: You may be right. Based on a recent survey of our customers, I think we can raise the price significantly for published advertising and still not lose business. Robert: That sounds promising; however, before we make a major recommitment to publishing, let's explore other possible explanations. I want to know how our costs compare with our competitors. Maybe we could be more efficient and find a way to earn a good return on teleadvertising. 

After this meeting, Robert and Jane requested an investigation of production costs and comparative efficiency of producing published versus online advertising services. The controller, Tim Gentry, indicated that ATI's efficiency was comparable to that of its competitors and prepared the following cost data:

Published Advertising Online Advertising Estimated number of production units 200,000 10,000,000 Selling price $200 $2.50 Direct product costs $21,000,000 $5,000,000 Overhead allocation* $10,780,000 $8,470,000 Overhead per unit $54 $0.85 Direct costs per unit $105 $0.50 Number of customers 180,000 25,000 Number of salesperson days 32,000 5,500 Number of art and design hours 35,000 5,000 Number of creative services subcontract hours 100,000 25,000 Number of customer service calls 72,000 8,000

*Based on direct labor costs

Upon examining the data, Robert decided that he wanted to know more about the overhead costs because they were such a high proportion of total production costs. He was provided the following list of overhead costs and told that they were currently being assigned to products in proportion to direct labor costs.

Selling costs $8,250,000 Visual and audio design costs 3,300,000 Creative services costs 5,500,000 Customer service costs 2,200,000

Using the data provided by the controller, prepare analyses to help Robert and Jane in making their decisions. (Hint: Prepare cost calculations for both product lines using ABC to see whether there is any significant difference in their unit costs).

Round rates to two decimal places, if needed.

Activity-based overhead rates:

Selling Answer

Design Answer

Creative services Answer

Customer services Answer

Activity Based Cost Assignments

Published Online Selling Answer

Answer

Design Answer

Answer

Creative services Answer

Answer

Customer services Answer

Answer

Total costs Answer

Answer

Units Answer

Answer

Cost per unit Answer

Answer

Enter answers using two decimal places. If Difference is negative - use a negative sign with your answer(s).

Total Production Cost per Unit Comparison

Anwser

Published Online Cost using ABC

Answer

Cost using Traditional

Answer

Difference Answer