Harvard Case - Accounting for Content at Demand Media
"Accounting for Content at Demand Media" Harvard business case study is written by Chris Sturby, Jessica Kelly. It deals with the challenges in the field of Accounting. The case study is 19 page(s) long and it was first published on : Jul 29, 2013
At Fern Fort University, we recommend that Demand Media implement a comprehensive cost accounting system that incorporates activity-based costing (ABC) principles to accurately track and allocate costs associated with content creation and distribution. This system will empower Demand Media to make informed decisions regarding resource allocation, pricing strategy, and profitability analysis.
2. Background
Demand Media, a leading content creation and distribution company, faced challenges in accurately accounting for the costs associated with its content creation process. The company's traditional cost accounting system, based on direct labor hours, failed to capture the true cost of content creation, leading to inaccurate profitability assessments and inefficient resource allocation.
The main protagonists in this case are:
- Richard Rosenblatt: CEO of Demand Media, who is concerned about the company's profitability and seeks to improve its cost accounting practices.
- The Finance Team: Responsible for developing and implementing the company's cost accounting system.
- Content Creators: The individuals responsible for creating and distributing content, who are impacted by the company's cost accounting practices.
3. Analysis of the Case Study
Strategic Framework:
The analysis of this case study is framed using the Value Chain Analysis framework, focusing on the primary activities involved in content creation and distribution.
- Inbound Logistics: Acquiring resources like writers, editors, and technology.
- Operations: Content creation, editing, and optimization.
- Outbound Logistics: Distribution of content through various channels.
- Marketing & Sales: Driving traffic to the content and monetizing it through advertising.
- Service: Providing customer support and managing content quality.
Key Issues:
- Inaccurate Cost Allocation: The traditional cost accounting system failed to accurately allocate costs across different content types and distribution channels.
- Lack of Visibility into Profitability: The company struggled to determine the profitability of individual content pieces and content categories.
- Inefficient Resource Allocation: The lack of accurate cost information led to inefficient resource allocation, potentially overinvesting in unprofitable content.
- Limited Decision-Making Support: The company lacked the necessary data to make informed decisions regarding pricing, content strategy, and resource allocation.
Financial Analysis:
- Balance Sheet: The company's balance sheet reflected a significant investment in technology and human capital, highlighting the need for accurate cost accounting to assess the return on these investments.
- Income Statement: The income statement showed a growing revenue base, but the lack of accurate cost allocation made it difficult to assess profitability and identify areas for improvement.
- Cash Flow Statement: The company's cash flow statement indicated a strong cash flow from operations, but the lack of accurate cost information limited the ability to optimize cash flow management.
4. Recommendations
- Implement Activity-Based Costing (ABC): Demand Media should adopt an ABC system to accurately allocate costs based on the specific activities involved in content creation and distribution. This will provide a more comprehensive view of the true cost of producing and distributing content.
- Develop a Cost Allocation Matrix: Create a matrix that maps cost drivers to specific activities and cost pools. This will enable the company to allocate costs more accurately and track the profitability of different content types and distribution channels.
- Establish Performance Indicators: Develop key performance indicators (KPIs) to measure the effectiveness of the cost accounting system and track improvements in cost allocation and profitability.
- Improve Budgeting and Forecasting: Implement a more robust budgeting and forecasting process that incorporates the insights gained from the new cost accounting system.
- Enhance Financial Reporting: Improve financial reporting to provide management with a clearer picture of the company's profitability and cost structure.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The proposed cost accounting system aligns with Demand Media's core competency in content creation and distribution by providing a more accurate and comprehensive understanding of the costs associated with these activities.
- External Customers and Internal Clients: The system will benefit external customers by ensuring that content is priced appropriately and internal clients by providing them with accurate data for decision-making.
- Competitors: By implementing a more sophisticated cost accounting system, Demand Media can gain a competitive advantage by making more informed decisions regarding pricing, resource allocation, and profitability.
- Attractiveness - Quantitative Measures: The ABC system will improve the accuracy of profitability analysis, allowing Demand Media to identify and invest in profitable content while reducing costs associated with unprofitable content.
- Assumptions: The recommendations assume that Demand Media has the necessary resources and commitment to implement a new cost accounting system and that the company is willing to invest in the necessary training and technology.
6. Conclusion
By implementing a comprehensive cost accounting system that incorporates activity-based costing principles, Demand Media can gain a clearer understanding of its cost structure, improve profitability, and make more informed decisions regarding resource allocation, pricing strategy, and business growth.
7. Discussion
Other alternatives not selected include:
- Continuing with the current cost accounting system: This would maintain the status quo but would continue to provide inaccurate cost information, leading to inefficient decision-making.
- Implementing a simpler cost accounting system: While simpler systems might be easier to implement, they may not provide the level of detail and accuracy required for effective decision-making.
Key Risks and Assumptions:
- Resistance to change: There may be resistance from employees who are accustomed to the current cost accounting system.
- Implementation costs: Implementing a new cost accounting system will require an investment in technology, training, and resources.
- Data accuracy: The accuracy of the cost accounting system depends on the accuracy of the data collected.
8. Next Steps
- Develop a detailed implementation plan: This plan should outline the specific steps involved in implementing the new cost accounting system, including timelines, resources, and responsibilities.
- Pilot the system: Pilot the new system in a limited area before rolling it out company-wide.
- Train employees: Provide employees with the necessary training to understand and use the new system effectively.
- Monitor and evaluate: Regularly monitor the performance of the new system and make adjustments as needed.
By taking these steps, Demand Media can successfully implement a new cost accounting system that will improve its financial performance and support its long-term growth strategy.
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Case Description
An analyst is assessing Demand Media's accounting policies in the face of media scrutiny around its capitalization of media costs as well as some of its non-GAAP disclosures. She has to decide whether it is appropriate to capitalize these costs. In order to do so, she must evaluate whether the costs meet the definition of an asset. After analyzing the company, its business model and its strategy, she can compare its content costs to various other companies that create "content" (intellectual property); competing accounting policies are also examined. The analyst can then determine the appropriate accounting treatment and whether any adjustments are warranted. With respect to non-GAAP earnings, she can decide whether the metrics proposed by the company are appropriate in order to measure performance.
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