Even though the volume of revenues has been steadily rising at the Treadwell Advertising Agency, its costs have been increasing at a faster rate. Thus, the ratio of profit to net revenue has decreased. Treadwell’s principal source of revenue is commissions earned for placing advertisements in various communication media, such as television, magazines, and newspapers.

Publishers and other communications companies bill Treadwell at a scheduled rate less a 12 percent commission. Treadwell in turn bills its clients at the full scheduled rate in addition to any special artwork or research requested by the client. To make a profit, Treadwell’s costs must be less than the 12 percent commission.

At present there are three departments: copy, art, and production. Each department has its own facilities with production having more equipment because it is responsible for conducting the mechanical aspects of the jobs, such as obtaining engravings, plates, printing, and photographs. Its staff salaries include those for the administrator, account executive, copywriters, artists, and production personnel. The account executive is the principal contact person between the agency and the client. Periodically, it must make outside purchases of mechanical and artwork items such as engravings and photographs for its clients.

Treadwell is now having problems with several clients who expect special artwork and research without an additional charge. Service charges are made based on the staff hours required to develop pamphlets, folders, or booklets. Treadwell adds a flat 5 percent for an estimate of the cost of any supplies required to this hourly charge. However, because one of its large clients complained so bitterly last month over its service charge, Treadwell dropped part of the fee. Treadwell management made the charge elimination because it recognizes that a large part of its costs are for creative skills. These skills are difficult to quantify, as all artists and writers have dry spells in which productivity is less than normal.

The company tries to accumulate the direct costs involved on jobs for which service charges are made. However,Treadwell readily admits that these records lack accuracy. Also, there has never been any continuous costing of its services. Treadwell only has a general idea of which client services are more profitable than others.

Required:

Describe the accounting information the company needs. How should top and middle managers each use this information?