3. At first glance, it appears that the company is losing money on local
commercials. However, the action analysis report indicates that if this
market segment were dropped, most of the costs are likely to continue
being incurred. The nature of the technical staff salaries is clearly critical
since it makes up the bulk of the costs. Management has suggested that
the technical staff are the company’s most valuable asset and that they
would be the last to go in case of financial difficulties. Nevertheless,
there are at least two situations in which these costs would be relevant.
First, dropping the local commercial market segment may reduce future
hiring of new technical staff. This would have the effect of reducing fu-
ture spending and therefore would reduce the company’s costs. Second,
if technical staff time is a constraint, dropping the local commercial mar-
ket segment would allow managers to shift technical staff time to other,
presumably more profitable, work. However, if this is the case, there are
better ways to determine which projects should get technical staff atten-
tion. This subject will be covered in Chapter 13 in the section on utiliza-
tion of scarce resources.
Finally, the cost of the animation concept at the proposal stage is a ma-
jor drag on the profitability of the local commercial market. The activity-
based costing system, as currently designed, assumes that all project
proposals require the same effort. This may not be the case. Proposals
for local commercials may be far less elaborate than proposals for major
special effects animation sequences for motion pictures. If management
has been putting about the same amount of effort into every proposal,
the above activity-based costing analysis suggests that this may be a
mistake. Management may want to consider cutting back on the effort
going into animation concepts for local commercials at the project pro-
posal stage. Of course, this may lead to an even lower success rate on
bids for local commercials.
Problem 8-30 (45 minutes)
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