Exercise 3-41 Overhead Application in a Service Industry Firm (LO 3-8} [T he following information applies to the questions displayed below] Small World Advertising is an advertising and public relations agency located in Portland, Oregon. This small ad agency, whose mission is to help for-prot socially oriented ventures achieve success by crafting an effective message and communicating it memorably to consumers, has two managing partners who pay themselves annual salaries of $100,000 each. An artistic and communications staff of six associates works on client engagements, and the associates earn $50,000 per year. Generous fringe benets are provided to help retain these talented professionals, and cost of benefits averages 42 percent of compensation for all employees. Small World Advertising's direct professional labor budget is as follows: Partner salaries $299,999 Partner benefits (42%) 84,999 Total partner compensation $284,999 Artistic and communications associate salaries $399,999 Associate benefits (42%) 126,999 Total associate compensation $426,999 Small World's accountant has estimated that one-third of the budgeted overhead cost is incurred to support the ad agency's two partners, and two-thirds of it goes to support the artistic and communications associates. During May, Small World Advertising completed an advertising project for EyeStyle Global, a company that sells eyeglasses and for each pair sold donates one pair of glasses to nonprofit agencies in low-income countries. The contract reouired $1.800 in direct material. $1.200 of partner direct professional labor. and $2.000 of artistic staff direct cycyluJJEs UIlu IVI CULII JUII JULY UVIJULES VIC PUII VI yIUSJES WV IIVIIPIVILLUyCIVICS III IVVIIICVINC CHILICO. HIIC LUILUILL required $1,800 in direct material, $1,200 of partner direct professional labor, and $2,000 of artistic staff direct professional labor (these labor costs include the cost of benefits). The total cost of the contract is computed as follows: Contract MJH0207 : Advertising Program for EyeStyle Global Direct material $ 1, 800 Direct professional labor (partner) 1, 200 Direct professional labor (associate) 2, 000 Applied overhead: Partner support ($1, 200 x 89%) 1, 068 Associate support ($2, 000 x 118%) 2, 360 Total cost $ 8, 428 The ad agency's annual overhead budget, which totals $756,000 (which includes the costs of the support staff, artistic and photographic supplies, office operation, utilities, rent, insurance, advertising, vehicle maintenance and depreciation.) appears in the illustration of overhead application below: Small World Advertising . Excel ? X FILE HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW Sign in F36 I X V f =SUM(FB:F35) A B C D E F SMALL WORLD ADVERTISING Annual Overhead Budget For the Year 20x6 OUAWN 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year8 Receptionist S 8,000 $ 8,000 $ 8,000 $ 8,000 $ 32,000 9 Secretarial 17,500 17,500 17,500 17,500 70,000 10 Accounting 10,000 10,000 10,000 10,000 40,000 11 Custodial 7,250 7,250 7,250 7,250 29,000 12 Support staff benefits 17,100 17,100 17,100 17,100 68,400 13 Artistic supplies 40,000 40,000 40,000 40,000 160,000 14 Photographic supplies 30,000 30,000 30,000 30,000 120,000 15 Office: 16 Computer 5,000 5,000 5,000 5,000 20,000 17 Photocopying 3,750 3,750 3,750 3,750 15,000 18 Office supplies 4,500 4,500 4,500 4,500 18,000 19 Postage 525 525 525 525 2,100 20 Utilities: 21 Electricity 3,250 3,250 3,250 3,250 13,000 22 Heat/air conditioning 4,000 4,000 4,000 4,000 16,000 23 Internet access 375 375 375 375 1,500 24 Cable TV 500 500 500 500 2,000 25 Telephone 775 775 775 775 3,100 26 Trash collection 600 600 600 600 2,400 27 Other 625 625 625 625 2,500 28 Building rent 12,500 12,500 12,500 12,500 50,000 29 Insurance 3,750 3,750 3,750 3,750 15,000 30 Advertising 5,000 5,000 5,000 5,000 20,000 31 Vehicle maintenance 1,000 1,000 1,000 1,000 4,000 32 Depreciation 33 Equipment 3,000 3,000 3,000 3,000 12,000 34 Vehicles 5,000 5,000 5,000 5,000 20,000 35 Other 5,000 5,000 5,000 5,000 20,000 36 Total overhead $ 189,000 $ 189,000 $ 189,000 $ 189,000 $ 756,000 27 Overhead Budget