Midtown Advertising Agency in Cincinnati Ohio This small ad

Midtown Advertising Agency in Cincinnati, Ohio. This small ad agency has two managing partners who pay themselves annual salaries of $100,000 each, and an artistic staff of six people who each earn $50,000 per year. Fringe benefits for these professionals average 42 percent of their compensation. So Midtown Advertising Agency’s direct professional labor budget is as follows:

Partner salaries

$

200,000

Partner benefits (42%)

84,000

Total partner compensation

$

284,000

Artistic staff salaries

$

300,000

Artistic staff benefits (42%)

126,000

Total artistic staff compensation

$

426,000

Midtown’s accountant has estimated that one-third of the budgeted overhead cost is incurred to support the ad agency’s two partners, and two-thirds of it goes to support the artistic staff.

During May, Midtown Advertising Agency completed an advertising project for Super Scoop Ice Cream Company. The contract required $1,800 in direct material, $1,200 of partner direct professional labor, and $2,000 of artistic staff direct professional labor. Overhead is assigned to each ad contract at the rate of 89 percent of partner direct professional labor plus 118 percent of artistic staff direct labor. The total cost of the contract is computed as follows:

Direct material

$

1,800

Direct professional labor (partner)

1,200

Direct professional labor (artistic staff )

2,000

Applied overhead:

Partner support ($1,200 × 89%)

1,068

Artistic staff support ($2,000 × 118%)

2,360

Total cost

$

8,428

The ad agency’s annual overhead budget, which totals $756,000 (which includes the costs of the support staff, artistic and photographic supplies, office operation, utilities, rent, insurance, advertising, vehicle maintenance and depreciation.) appears in the illustration of overhead application below:

1. Compute the total budgeted staff compensation: both partner and artistic staff compensation.

2. Compute Midtown’s overhead rate on the basis of this single cost driver (Round to the nearest whole percentage).

3. Recalculate the applied overhead for the Super Scoop Ice Cream Company Contract.

4. Compare the applied overhead using the single cost driver with the applied overhead computed using the two cost drivers used below.

Applied overhead using the single cost driver:

Applied overhead using two cost drivers:

Midtown Advertising Agency in Cincinnati, Ohio. This small ad agency has two managing partners who pay themselves annual salaries of $100,000 each, and an artistic staff of six people who each earn $50,000 per year. Fringe benefits for these professionals average 42 percent of their compensation. So Midtown Advertising Agency’s direct professional labor budget is as follows:

MIDTOWN ADVERTISING AGENCY Annual Overhead Budget For the Year 20x6 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year Support staff: Receptionist Secretarial Accountingg 8,000$8,000 $ 8,000 17,500 10,000 7,250 17,100 40,000 30,000 17,500 10,000 7,250 17,100 40,000 0,000 8,000 $ 32,000 7,500 70,000 10,00040,000 7,250 29,000 17,10068,400 0,000 160,000 30,000 120,000 17,500 10,000 17,100 40,000 0,000 Support staff benefits Artistic supplies Photographic supplies Office: Computer Photocopying Office supplies 5,000 3,750 4,500 5,000 3,750 4,500 5,000 3,750 4,500 5,000 20,000 3,750 15,000 4,500 18,000 Utilities 3,250 4,000 3,250 4,000 3,250 4,000 Electricity Heat/air conditioning Internet access Cable TV Telephone Trash collection 3,250 13,000 4,00016,000 375 1,500 500 2,000 Building rent Insurance Advertising Vehicle maintenance Depreciation 12,500 3,750 5,000 1,000 12,500 3,750 5,000 1,000 625 12,500 3,750 5,000 1,000 600 2,400 2,500 12,500 50,000 3,750 15,000 5,000 20,000 1,000 4,000 3,000 12,000 5,000 20,000 5,000 20,000 S189,000189,000189,000 189,000 756,000 3,000 5,000 5,000 3,000 5,000 5,000 3,000 5,000 5,000 Equipment Other Total overhead

Solution

1 Partner Artistic Staff Total Budgeted Compensation Partner salaries $       200,000 Artistic staff salaries $ 300,000 $                              500,000 Add: Partner benefits (42%)             84,000 Add:Artistic staff benefits (42%)      126,000                                  210,000 Total partner compensation $       284,000 Total artistic staff compensation $ 426,000                                  710,000 2 Predetermined overhead rate = Total overhead ÷ Total budgeted compensation Predetermined overhead rate = 756000 ÷ 710000 Predetermined overhead rate = 106% of per $ budgeted compensation 3 Direct professional labor (partner)               1,200 Direct professional labor (artistic staff )               2,000 Total Compensation                     3,200 Budgeted Overhead 3200 x 106% = $                                                    3,392 4 Applied overhead using the single cost driver: $                                                    3,392 Applied overhead using two cost drivers: $    3,428