Question

$175,000 4overhead
Cost Definitions
Social Media: expenses related to marketing the company on social media platforms. The
primary component of which is the salary of one part-time social media specialist.
TV and Radio: the cost of TV and Radio campaigns designed to attract potential customers. The
department employs a full time employee to oversee this activity.
Direct Marketing: the expenses related to direct marketing such as paper mail, emails, and phone
calls to current and potential clients. The company hires an outside firm to conduct this type of
marketing.
Mailing and Distribution: the cost of designing, printing and distributing documents such as
prospectuses, annual reports and shareholder notices. The department employs a full time
employee to oversee this activity.
All Other Expenses: all department expenses not separately listed. This category includes
depreciation on computers and equipment, building and equipment maintenance, and
miscellaneous expenses that cannot be easily categorized, including Jennifer's salary.
Funds Offered
Jennifer's company offers three funds: The Silver Fund caters to retirees and clients that have a
retirement horizon within the next 10 years. The Institutions Fund caters to large institutional
investors and high net worth individuals. The Future Fund is for younger investors with an
average age of 33.
Information about the asset size and resource usage of these funds is provided below:
Silver Fund
Institutions Fund
Future Fund
Assets under management
$150 M
$250 M
$100 M
No. of Clients
600
100
2,800
No. of Pages Mailed
20,000
7,000
3,000
No. of TV & Radio Spots
35
0
35
Social Media %
25%
15%
60%

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ABC Proposal
Jennifer learned about activity based costing (ABC) in her MBA managerial accounting class
and is thinking about proposing that the company implement an ABC system to allocate
marketing and communications costs to the company's funds. Based on her experience and
available data she believes that each cost category should be allocated based on the following
cost drivers:
Social Media - percentage of time the social media specialist spends on promoting each fund
Direct Marketing - the number of clients in each fund
IV and Radio Advertising - number of TV and radio spots
Mailing and Distribution - number of pages mailed
All other Expense - assets under fund management
Assignment
Instructions: Please embed your answers inside the document after each question. If you are
unsure about something, feel free to email me for guidance.
1.
Under the current cost allocation system, all marketing and communications expenses are
allocated based on assets under management. Calculate the cost allocated to each fund
under the current system and the Jennifer's newly proposed ABC system.
2.
Compare the allocated costs in the two methods from part 1. Which activities seem to be
driving the differences in allocated costs?
3.
Should Jennifer's company begin allocating marketing and communications costs to the
funds using her proposed ABC system, or should they stick with the old system? What
are some pros and cons of both?
4 .
Jennifer was able to account for the number of hours the social media specialist spent
working on promoting each fund. The specialist's contract specifies that he be paid for
1,000 hours per year at a rate of $38 per hour. Jennifer found that the specialist worked
200 hours on the Silver Fund, 120 hours on the Institutions Fund, and 480 hours on the
Future Fund. Recalculate the social media costs allocated to each fund using social media
hours instead of percentage, where the rate is based on capacity rather than hours
worked. Note that the budgeted social media expense includes costs that are not directly
associated with the social media expert's salary. Are social media expenses under- or
over-applied using the capacity based system and by how much?
5.
Given the data available, provide at least one proposal to reduce costs in Jennifer's
your answer.
department. Make reasonable assumptions as necessary, and state these assumptions in

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