Activity-based costing implementation for Netflix's fixed costs

Accounting

ABC at Netflix

To; CEO Netflix

From; XXXX

Re; Move to Activity-Based Costing (ABC)

Activity-based costing has the potential to increase transparency in accounts, compared to absorption costing. Activity-based costing breaks down of the different tasks into the different elements, determining the costs of each activity to create a product or service. This breakdown of costs can them be used to allocate costs for the production process and give an accurate picture of the costs associated with producing each item or serving each customer (Innes & Mitchell, 1998).

Variable costs are easy to allocate to the different products or customers, the greatest value from activity-based costing is the way that fixed, or indirect costs, can be assessed and allocated based on the actual usage. Netflix may benefit from this approach due to the high level of fixed costs and low level of variable costs that are associated with providing the media streaming services. The ability of the firm to assess costs for the service provided, such as serving each customer each month, may allow for better quality input information to the pricing decisions (Innes & Mitchell, 1998).

There are a number of fixed costs, or indirect costs, that need to be assessed. By looking at some of these costs and how they may be allocated in line with activity-based costing the value of the system may be realized. The breaking down of the costs will then allow the firm to assess the cost associated with each customer. These five examples utilized maybe argued some of the most critical to the company's success, as they deal with the main operational aspects of providing content, delivering it to the customers, collecting payments, looking after customers as well as ensuring the company's reputation is maintained for security. If any of these elements failed, it could have a significant impact on the company's sales, as customers would potentially even go elsewhere.

Internet Access Costs

The firm will have costs associated with access the internet and providing the content. The costs are an overhead, but as the number of users increases and more content is streamed the firm needs more bandwidth. As the costs are incurred on the streaming, the costs may be calculated as a total and then divided by the megabit that is streamed, and then allocated by the megabit that is streamed.

Banking Fees

The firm has to pay fees for the operational banking services, including the collection of the direct debits. The cost of these banking services may be divided by the number of transaction. So, the cost of collected the direct debits should be divided by the number of direct debits which are