Question

Pixel Studio, Inc., is a small company that creates computer-generated animations for films and television. Much of the company’s 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 business—particularly since many competitors have sprung up recently in the local area. To help understand the company’s 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:

  

Activity Cost Pool	Activity Measure	Activity Rate
Animation concept	Number of proposals	$	7,080	per proposal
Animation production	Minutes of completed animation	$	7,770	per minute
Contract administration	Number of contracts	$	5,890	per contract

  

These activity rates include all of the company’s costs, except for the costs of idle capacity and organization-sustaining costs. There are no direct labor or direct materials costs.

Preliminary analysis using these activity rates has indicated that the local commercial segment of the market may be unprofitable. This segment is highly competitive. Producers of local commercials may ask three or four companies like Pixel Studio to bid, which results in an unusually low ratio of accepted contracts to bids. Furthermore, the animation sequences tend to be much shorter for local commercials than for other work. Since animation work is billed at fairly standard rates according to the running time of the completed animation, this means that the revenues from these short projects tend to be below average. Data concerning activity in the local commercial market appear below:

  

Activity Measure	Local Commercials
Number of proposals	18
Minutes of animation	13
Number of contracts	9

  

The total sales from the 9 contractors for local commercials amounted was $140,000.

  

In addition, the company has provided the following details concerning its activity rates:

  

	Activity Rates
	Animation Concept		Animation Production		Contract Administration
Technical staff salaries	$	4,300	$	4,600	$	900
Animation equipment depreciation		650		2,000		0
Administrative wages and salaries		1,600		250		4,800
Supplies costs		290		560		120
Facility costs		240		360		70
Total	$	7,080	$	7,770	$	5,890

  

Management has provided the following ease of adjustment codes for the various costs:

  

	Ease of Adjustment Code
Technical staff salaries	Red
Animation equipment depreciation	Red
Administrative wages and salaries	Yellow
Supplies costs	Green
Facility costs	Red

  

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.”

  

Required:
1.	Determine the cost of the local commercials market. (Think of the local commercials market as a product.)

        

2.	Prepare an action analysis report concerning the local commercial market. (This company has no direct materials or direct labor costs.)

       

Answer 1

Part 1
Activity Cost Pool	Activity Rate		Activity		ABC Costs
Animation Concept	$         7,080.00	per proposal	18	Proposals	$ 1,27,440.00
Animation Production	$         7,770.00	per minute	13	Minutes	$ 1,01,010.00
Contract Administration	$         5,890.00	per contract	9	Contracts	$     53,010.00
					$ 2,81,460.00

Part 2
Profitability Analysis
Sales	$   1,40,000.00
Costs:
Animation Concept	$   1,27,440.00
Animation Production	$   1,01,010.00
Contract Administration	$       53,010.00
Margin	$ -1,41,460.00

Sine the company is making a loss here, it is adivsied to look at the costs incurred and find the costs which can be avoidable to make the segment profitable. Staff salaries and technical managers pay are the areas where subsantial cuts can be made in the salary or the performance based pay of the department can be introducted.