Question

Platinum Tracks, Inc, Is a small audio recording studio located in Los Angeles. The company handles work for advertising agencles-primarıly for radio ads-and has a few singers and bands as clients. Platinum Tracks handles all aspects of recording from editing to making a digital master from which CDs can be copled. The competition In the audio recording Industry in Los Angeles has always been tough, but it has been getting even tougher over the last several years. The studio has been losing customers to newer studios that are equipped with more up-to-date equipment and that are able to offer very attractive prices and excellent service. Summary data concerning the last two years of operations follow. This Year Last Year Estimated hours of studio service 1,1ee $ 95,000 85e Estimated studio overhead cost Actual hours of studio service provided Actual studio overhead cost incurred Hours of studio service at capacity $ 95, eee 1, eee 758 95, e00 1,900 95, e00 1,900 The company appliles studio overhead to recording jobs on the basis of the hours of studio service provided. For example, 36 hours of studio time were required to record, edit, and master the Verde Baja music CD for a local Latino band. All of the studio overhead cost is fixed, and the actual overhead cost incurred was exactly as estimated at the beginning of the year in last year and this year. Required: 1. Platinum Tracks computes its predetemined overhead rate at the beginning of each year based on the estimated studio overhead cost and the estimated hours of studio service for the year. Using this approach, how much overhead would have been applied to the Verde Baja Job last year? How about this year? 2 The president of Platinum Tracks has heard that some companles in the Industry have changed to a system of computing the predetermined overhead rate based on the hours of studio service that could be provided at capacity. He would like to know what effect this method would have on job costs. How much overhead would have been applied using this method to the Verde Baja Job if it had been done last year? This year? 3. If Platinum Tracks computes Its predetermined overhead rate based on the hours of studto service that could be provided at capacity as in (2) above, how much unused capacity cost would the company have incurred last year? This year?

Answer 1

1 Overhead Applied (a) Estimated Studio Overhead Cost Estimated hours of studio service Predetermined Overhead Rate Multiply Studio hour of Verda Baja's job Overhead applied to Verda Baja Last Year 95000 1100 $ 86.36 36 $ 3,109 This Year 95000 850 111.76 (b) (a)/(b) $ $ 4,023 2 Overhead Applied Estimated Studio Overhead Cost Hours of studio service at Capacity Predetermined Overhead Rate Multiply Studio hour of Verda Baja's job Overhead applied to Verda Baja (a) (b) (a)/(b) Last Year 95000 1900 50.00 36 $ 1,800 This Year 95000 1900 50.00 $ 36 $ 1,800 Unused Capacity in hours Multiply Predetermined Overhead Rate at capacity Cost of Unused Capacity Last Year 900 $ 50.00 $ 45,000.00 This Year 1150 $ 50.00 $ 57,500.00 Unused capacity in hours = Hours at capacity - Actual hours Last Year = 1900 hrs - 1000 hours = 900 hours This Year = 1900 hours - 750 hours = 1150 hours