Question

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 teleadvertising 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 $1.27 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*	$9,800,000	$7,700,000
Overhead per unit	$49	$0.77
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	$7,500,000
Visual and audio design costs	3,000,000
Creative services costs	5,000,000
Customer service costs	2,000,000

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
	Published	Online
Cost using ABC	Answer	Answer
Cost using Traditional	Answer	Answer
Difference	Answer	Answer

Answer 1

1. Activity based overhead rates:

Selling (7,500,000/37,500 (32000+5500)	$200
Design (3,000,000/40,000 (35000+5000)	75
Creative services (5,000,000/125,000 (100,000+25,000)	40
Customer services (2,000,000/80,000 (72000+8000)	25

2. Activity based cost assignment:

	Published	Online
Selling	$6,400,000	$1,100,000
Design	2,625,000	375,000
Creative services	4,000,000	1,000,000
Customer services	1,800,000	200,000
Total cost	$14,825,000	$2,675,000
Units	200,000	10,000,000
Cost per unit	$74.12	$0.27

Total production cost per unit comparison
	Published	Online
Cost using ABC	$179.12 ($105+74.12)	$0.77 ($0.50+0.27)
Cost using traditional	154 (105+49)	1.27 (0.50+0.77)
Difference	$25.12	-$0.5