Question

Platinum Tracks, Inc., is a small audio recording studio located in Los Angeles. The company handles work for advertising agencies—primarily 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 copied. 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:

  

	Last Year		This Year
Estimated hours of studio service		1,600		1,350
Estimated studio overhead cost	$	108,000	$	108,000
Actual hours of studio service provided		1,500		1,250
Actual studio overhead cost incurred	$	108,000	$	108,000
Hours of studio service at capacity		2,400		2,400

  

The company applies studio overhead to recording jobs on the basis of the hours of studio service provided. For example, 47 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 predetermined 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 companies 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 studio 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						Last year	This year
	Estimated studio overhead cost				a	108000	108000
	Estimated hours of studio service				b	1600	1350
	Predetermined overhead rate				c=a/b	67.50	80.00
	Actual hours of studio time for the job				d	47	47
	Overhead applied to Verde baja job				e=c*d	3173	3760
2						Last year	This year
	Estimated studio overhead cost				a	108000	108000
	Hours of studio service at capacity				b	2400	2400
	Predetermined overhead rate				c=a/b	45	45
	Actual hours of studio time for the job				d	47	47
	Overhead applied to Verde baja job				e=c*d	2115	2115
3						Last year	This year
	Hours of studio service at capacity				a	2400	2400
	Actual hours of studio service provided				b	1500	1250
	Unused capacity in hours				c=a-b	900	1150
	Predetermined overhead rate				d	45	45
	Cost of unused capacity				e=c*d	40500	51750