Farmington and Associates designs relatively small sports stadiums and arenas at various sites throughout the country. The firm's accountant prepared the following budget for the upcoming year:Professional staff salaries$3,000,000Administrative support staff800,000Other operating costs200,000Eighty percent of professional staff salaries are directly traceable to client projects, a figure that falls to 60% for the administrative support staff and other operating costs. Traceable costs are charged directly to client projects; nontraceable costs, on the other hand, are treated as firm overhead and charged to projects by using a predetermined overhead application rate.Farmington had one project in process at year-end: an arena that was being designed for Toll County. Costs directly chargeable
to this project were:Professional staff salaries$90,000Administrative support staff17,300Other operating costs6,700Required: A. Determine Farmington's overhead for the year and the firm's predetermined overhead application rate. The rate is based on costs directly chargeable to firm projects.B. Compute the cost of the Toll County arena project as of year-end.C. Present three examples of "other operating costs" that might be directly traceable to the Toll County project.
What will be an ideal response?
A.
| Professional staff salaries | ? | $3,000,000 |
| Administrative support staff | ? | 800,000 |
| Other operating costs | ? | 200,000 |
| Subtotal | ? | $4,000,000 |
| Less: Direct costs | ? | ? |
| Professional staff salaries ($3,000,000 × 80%) | $2,400,000 | ? |
| Administrative support staff and other costs [($800,000 + $200,000) × 60%] | 600,000 | 3,000,000 |
| Nontraceable costs (i.e., overhead) | ? | $1,000,000 |
Predetermined application rate: $1,000,000 ÷ $3,000,000 = 33.33%
B.
| Professional staff salaries | $90,000 |
| Administrative support staff | 17,300 |
| Other operating costs | 6,700 |
| Subtotal | $114,000 |
| Overhead: $114,000 × 33.33% | 38,000 |
| Total | $152,000 |
C. Possible examples include travel, overnight delivery fees, postage, selected costs related to conducting focus-group studies, photocopying, and supplies related to model construction.
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