Social Media, Inc. (SMI) has two services for users. Toot!, which connects tutors with students who are looking for tutoring services, and TiX, which can be used to buy, sell, or exchange event tickets. For the following year, SMI expects the following results. Toot! TiX Total Users 15,500 22,100 37,600 Revenues $ 2,000,000 $ 2,080,000 $ 4,080,000 Engineering hours 10,400 8,400 18,800 Engineering cost $ 881,000 $ 999,000 $ 1,880,000 Administrative costs $ 1,504,000 The company is considering using a two-stage cost allocation system and wants to assess the effects on reported product profits. The company is considering using Engineering Hours and Users as the allocation base. Additional information follows. Toot! TiX Total Engineering hours 10,400 8,400 18,800 Users 15,500 22,100 37,600 Engineering-hour related administrative cost $ 199,280 User-related administrative cost $ 1,304,720 Required: a. Compute the predetermined overhead rate used to apply the two administrative costs pools to the two services assuming SMI uses the proposed two-stage cost system to allocate administrative costs. b. Based on the rates computed in requirement (a), what is the profit for each service?
Social Media, Inc. (SMI) has two services for users. Toot!, which connects tutors with students who are looking for tutoring services, and TiX, which can be used to buy, sell, or exchange event tickets. For the following year, SMI expects the following results.
| Toot! | TiX | Total | |||||||
| Users | 15,500 | 22,100 | 37,600 | ||||||
| Revenues | $ | 2,000,000 | $ | 2,080,000 | $ | 4,080,000 | |||
| Engineering hours | 10,400 | 8,400 | 18,800 | ||||||
| Engineering cost | $ | 881,000 | $ | 999,000 | $ | 1,880,000 | |||
| Administrative costs | $ | 1,504,000 | |||||||
The company is considering using a two-stage cost allocation system and wants to assess the effects on reported product profits.
The company is considering using Engineering Hours and Users as the allocation base. Additional information follows.
| Toot! | TiX | Total | |||||||
| Engineering hours | 10,400 | 8,400 | 18,800 | ||||||
| Users | 15,500 | 22,100 | 37,600 | ||||||
| Engineering-hour related administrative cost | $ | 199,280 | |||||||
| User-related administrative cost | $ | 1,304,720 | |||||||
Required:
a. Compute the predetermined
b. Based on the rates computed in requirement (a), what is the profit for each service?
A cost allocated to produce a product or service is called Overhead rate. Overhead costs are the indirect expenses that are tied to production costs.
The overhead costs are allocated or distributed based on specific measures. To calculate overhead rates, indirect costs are divided by allocation measures.
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