• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month
  1. 1
  2. 2
  3. 3
  4. 4
  5. 5
  6. 6
  7. 7
  8. 8
  9. 9
  10. 10
  11. 11
  12. 12

Management Accounting Cost Allocation - Graffiti/BBDO Sofia.

Extracts from this document...


Mr. Ioannis Pazmatzis Course title: Financial Reporting, Management Accounting, Financial Strategy Management Accounting Cost Allocation Graffiti/BBDO Sofia Dessislava Pencheva MBA Executive Cohort 8a C O N T E N T 1. Abstract 2. Introduction 2.1.Company Overview 2.2. Organizational Structure 2.3. Management Control & Decision Making 3. Problem definition 4. Possible solutions or How to estimate the cost of services? 4.1 Cost Driver 4.2 Variable & Fixed Costs 4.3 Cost Centres, Cost Pools & Profit Centres 5. Budgets & Control on Engagements 5.1. Activity Based Costing 5.2. Classifications on Overhead Rates 6. Can Graffiti/BBDO Sofia bear new clients or no? 6.1 Capacity Decisions 6.2. Pricing Decisions 7. Conclusion 8. References ABSTRACT The advertising business in Bulgaria is in its early teenage years. However, 12 years after the fall of the communist regime the advertising industry in Bulgaria experiences a boom. The competitiveness of the market implies flexibility and correct cost allocation, pricing and capacity decisions. There are different ways the client in a service industry such as the advertising to be charged, they are - on the bases of agency hours, agency commission over the budget, fixed commission, etc. The decisions for the cost allocation methods and the ways of charging are taken by the managing team of the agency together with and based on the data provided by the financial department. The decision for charging however, is influenced by the client's opinion and preferences. I. Introduction 1.1. Company overview Graffiti/BBDO Sofia is an affiliated institution of BBDO Worldwide, one of the leading advertising agencies, part of the Communication Group Omnicom/a consortium of advertising, PR and marketing communication agencies. The company has been found in march 1994 in Sofia and has started with just one client - one of the biggest BBDO clients - Wrigley's. later on the agency has acquired more clients both worldwide BBDO clients, as well as locally won accounts. Graffiti/BBDO is a full service agency, which provides development of advertising or more accurately communication strategies, which include creative, media planning and buying, PR & BTL activities, design and production of POS materials, following the competitor's activities, etc. ...read more.


Most of the agencies just provide the creative work for free for its full service clients. In this case the agency must calculate the work and the costs that the creative department incurs into the agency commission. However, it is not always the case. In terms of production department it is easier. Here within the service company products are being produced - products such as P.O.S. materials, TV & radio spots, billboards, etc. In most of the advertising agencies these products are being produced by sub-contractors. In most of the cases the agency charges with agency commission on the production budget. This commission covers the costs incurred by the creative department in terms of design and the price for pre-printing of the d.t.p. specialists, as well as the costs made by the client service department - the department that co-ordinates the different departments in the agency and communicates with the client. Let's take a specific example: Case I Task: Production of 10 000 posters 50/70sm, paper 200 gr. Activities performed by the agency: 1. Client service department takes the order from the client, prepares a creative brief for the creative department and controls the whole process- 5 hours 2. Creative department makes the design - 4 hours 3. Desk top publisher makes the pre-printing - 2 hours 4. Production manager - search for the best sub-contractor in terms of price and periods for completing the order, co-ordination of the work of the printing house, delivering the posters to the client --7 hours. Total: 18 agency hours Costs of the posters is however calculated as follows: 1. Films - 50.00 lv 2. Colour probe - 100.00 lv 3. Paper + Print - 1,20 lv/poster = 12 000 lv. Total cost for production of 10 000 posters 12 150lv Agency commission - 10% or 1215 lv In terms of agency hours the price for an agency hour is equal to less than $80. ...read more.


The simple accounting analysis advised the managing director of Graffiti/BBDO to refuse the new client. Hopefully the managing director advised by the HR manager accepted the new account and covered it financially by hiring part time employees/sub-contractors in the creative department. Of course the accountants give relevant data and analysis to the Executive managers, however the final managerial decisions need a lot more data than just financial in order to be taken. In the example shown if Graffiti/BBDO hires permanent employees the marginal costs for handling this new client will exceed the marginal revenue. Thus the project won't be profitable. 6.1 Pricing Decisions One more reason for the difficulties in cost accounting in the service industry and especially in the advertising business is the fact that the pricing is discriminatory. For one and the same services different clients are charged differently. Especially in the period after the fall of the communist regime the first advertising agencies have been charging the Bulgarian companies very low and the multinational companies very high. Today 12 years later when the advertising market is almost regulated the competition rarely allows for such differentiation. 7. Conclusion The problems with cost allocation, capacity decisions and pricing decisions at Graffiti/BBDO Sofia has been solved and are being solved by the managerial team together with the financial department of the agency. There are different ways in which the costs in the agency are allocated. Costs are allocated by activities, by department, by client, by agency hours etc. "Most often however, the way of charging is determined not just by the agency but by the clients also. And sometimes agencies win a pitch for a new client not because of better creative proposals or because of more effective media planning, but because of more flexible ways of charging, which is highly valued by the clients today"/interview with Sofia Peneva, Graffiti/BBDO Sofia - CEO/. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Accounting & Finance section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Accounting & Finance essays

  1. In this assignment I am opening a tuck shop in the school grounds and ...

    A delivery note can be: - - posted to the customer; or - it can travel with the goods. * Goods Received Note: A good received note is completed by the customer to record goods (not services) received and their condition.

  2. Financial Services

    hold bank accounts for several reasons: * To keep their money safe * Easier method these days to pay off bills And many more benefits. "Living within our means" is a goal we all should strive to achieve. It's absolutely vital when you're between jobs and don't have much savings to tide you over.

  1. Unit 5 Introduction to Accounting

    business is performing compared to other investments you could make with it, like putting it in the bank. Other key accounting ratios There are a number of other commonly used accounting ratios that provide useful measures of business performance. These include: * liquidity ratios, which tell you about your ability

  2. Personal budget

    Irregular payment means that the income that you get is not always going to be the same every time that you get paid e.g. your job could be cash in hand or your job might not have set hours. A regular payment is where you get a set amount of payment every time that you get paid.

  1. Costs, Profits and Break-even Analysis.

    Any one of the criteria above could be used to draw up a map. For example, Cameron's may want to look at the behaviouristic split of their market. They could draw up a segmentation map: Flying Amateur Professional Sponsorship On this map they could plot where their various groups of customers tend to be.

  2. The Purpose of Keeping Accurate Accounts

    Basically the concept says that whenever there are alternative procedures or values, the accountant will choose the one that results in a lower profit, a lower asset value and a higher liability value. The concept is summarised by the well known phrase 'anticipate no profit and provide for all possible losses'.

  1. Enron Case Analysis

    [1] 5.0 Accounting Practices Enron's top executives and their board members measured performance strictly by the numbers. Actually, it was just one number that they truly focused on, the share price. For those at these top levels, the share price determined how much money would end up in their own pockets.

  2. The Nature of Income measurements

    Hence in economics, income is the residue i.e. the economists computes capital to measure income whereas in traditional accounting, capital is the residual figure after income is calculated. Although both accounting and economic income are capital based, there are significant difference in measuring capitals, because economist's version of income measurement

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work