Question

Use the following labor budget data for Roy & Miller Accounting, LLP. Partner Salaries $ 400,000 Partner Benefits (40%) 160,000 Total Partner Compensation $ 560,000 Staff Accountant Salaries $ 600,000 Staff Benefits (40%) 240,000 Total Staff Compensation $ 840,000 The budgeted overhead cost for the year is $1,260,000. The company has estimated that one-third of the budgeted overhead cost is incurred to support the firm's two partners, and two-thirds goes to support the staff accountants. The current audit bid for Monoco Industries requires $18,000 in direct partner professional labor, $30,000 in direct staff accountant professional labor, $5,000 in direct material. If overhead is applied on the Monoco engagement based on a single-cost driver basis, what is the total cost of the engagement?

Answer 1

Ans: $ 96,200

First, we will compute the single-cost driver for the overheads.
At present, the total compensation to the partners and staff accountants is ->
Compensation to partners + Compensation to staff accountants
= $560,000 + $840,000
= $1,400,000

Now the total overheads given in the question are $1,260,000 (We will not bifurcate the overheads into attributable to partners and attributable to staff accountants as the question mentions that we have to apply overheads on the basis of a single-cost driver. The single cost driver here is the combined compensation)

Hence the single cost-driver rate = Total Overheads/Total Compensation
= $ 1,260,000/$1,400,000
= 90% of compensation.

Regarding Monoco Industries Engagement-

Cost of the engagement= Total Compensation + Overheads allocated based on single-cost driver + Direct materials

Total Compensation = Compensation to Partners + Compensation to staff accountants
= $18,000 + $30,000
= $48,000

Overheads = 90% of compensation
=90% of $48,000
=$43,200

Direct Material = $5,000

Hence total cost of the engagement = $48,000 + $43,200 + $5,000
=$96,200