Problem 6-58 (Static) Predetermined Rates and Product Profitability: Two Stage Cost Allocation (LO 6-3, 4, 5) 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 9,000 15,000 24,000 Revenues $ 1,200,000 $ 800,000 $ 2,000,000 Engineering hours 10,000 6,000 16,000 Engineering cost $ 240,000 $ 360,000 $ 600,000 Administrative costs $ 480,000 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 10,000 6,000 16,000 Users 9,000 15,000 24,000 Engineering-hour related administrative cost $ 120,000 User-related administrative cost $ 360,000 SMI thought that maybe there should be three types of administrative costs. They felt that some of the costs in the User-related pool were more related to revenue than to users. Specifically, they revised their breakdown of administrative costs as follows. Engineering-hour related administrative cost $ 120,000 User-related administrative cost 210,000 Revenue-related administrative cost 150,000 Total administrative cost $ 480,000 Required: a. Compute the predetermined overhead rate used to apply the three administrative costs pools to the two services assuming SMI uses the 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?

Problem 6-58 (Static) Predetermined Rates and Product Profitability: Two Stage Cost Allocation (LO 6-3, 4, 5) 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 9,000 15,000 24,000 Revenues $ 1,200,000 $ 800,000 $ 2,000,000 Engineering hours 10,000 6,000 16,000 Engineering cost $ 240,000 $ 360,000 $ 600,000 Administrative costs $ 480,000 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 10,000 6,000 16,000 Users 9,000 15,000 24,000 Engineering-hour related administrative cost $ 120,000 User-related administrative cost $ 360,000 SMI thought that maybe there should be three types of administrative costs. They felt that some of the costs in the User-related pool were more related to revenue than to users. Specifically, they revised their breakdown of administrative costs as follows. Engineering-hour related administrative cost $ 120,000 User-related administrative cost 210,000 Revenue-related administrative cost 150,000 Total administrative cost $ 480,000 Required: a. Compute the predetermined overhead rate used to apply the three administrative costs pools to the two services assuming SMI uses the 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?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Problem 6-58 (Static) Predetermined Rates and Product Profitability: Two Stage Cost Allocation (LO 6-3, 4, 5)

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		9,000			15,000		24,000
Revenues	$	1,200,000		$	800,000	$	2,000,000
Engineering hours		10,000			6,000		16,000
Engineering cost	$	240,000		$	360,000	$	600,000
Administrative costs						$	480,000

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	10,000		6,000		16,000
Users	9,000		15,000		24,000
Engineering-hour related administrative cost				$	120,000
User-related administrative cost				$	360,000

SMI thought that maybe there should be three types of administrative costs. They felt that some of the costs in the User-related pool were more related to revenue than to users. Specifically, they revised their breakdown of administrative costs as follows.


Engineering-hour related administrative cost	$	120,000
User-related administrative cost		210,000
Revenue-related administrative cost		150,000
Total administrative cost	$	480,000

Required:

a. Compute the predetermined overhead rate used to apply the three administrative costs pools to the two services assuming SMI uses the 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?

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