Implementing Activity-Based Costing at Netflix

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.

Content Licenses

The firm sells monthly subscription for the users to access televise programs and films. The provide access the firm has to buy the content. These licenses are usually purchased for a fixed amount for several years (Netflix, 2013). The cost is high, but could be allocated based on the number of downloads. The company will project how many times the program or film is expected to be streamed. The total cost of the license, including all the costs associated with the acquisition as well as the license cost itself, may then be divided by the total number of expected downloads or streaming occurrences. For example, if a license costs $500,000 and it is expected that the TV program of film will be streamed 5 million time, the allocated cost will be $0.10 per download.

Internet Access Costs