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Management Accounting Cost Allocation - Graffiti/BBDO Sofia.

Extracts from this document...

Introduction

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.

Middle

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.

Conclusion

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.

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