Question

Social Media, Inc. (SMI) has two services for users. Too!, which connects teachers with students who are looking for teaching 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		13,100			20,100			33,200
Revenues	$	1,800,000		$	1,760,000		$	3,560,000
Engineering hours		9,300			7,300			16,600
Engineering cost	$	687,750		$	806,250		$	1,494,000
Administrative costs							$	1,195,200

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		9,300			7,300			16,600
Users		13,100			20,100			33,200
Engineering-hour related administrative cost							$	162,680
User-related administrative cost							$	1,032,520

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?

Answer 1

Solution:

	Engineering Hours	users related
Administrative Costs	162680	1032520
/ Total Users	16600	33200
Pre-determined overhead rate	9.80	31.10
	Per hour	per user

Computation of Profit
	Toot!	Tix	Total
Revenue	1800000	1760000	3560000
Less: costs
Engineering costs	687750	806250	1494000
Administrative costs:
(Engineering hours*$9.80)	91140	71540	162680
(users *$31.10)	407410	625110	1032520
Profit	613700	257100	870800