Pinnacle Consulting employs two CPAs, each having a different area of specialization. Judy specializes in tax consulting and Steve specializes in management consulting. Pinnacle expects to incur total overhead costs of $519,750 during the year and applies overhead based on annual salary costs. Judy is a senior partner, her annual salary is $225,000, and she is expected to bill 2,000 hours during the year. Steve is a senior associate, his annual salary is $121,500, and he is expected to bill 1,800 hours during the year.a. Calculate the predetermined overhead rate.b. Assuming that the hourly billing rate should be set to cover the total cost of services plus a 20% markup, compute the hourly billing rates for Judy and Steve.
What will be an ideal response?
a. Predetermined Overhead Rate: $519,750 / ($225,000 + 121,500) = 150% of Salary Cost
b. Judy's billing rate = Annual Salary + Overhead (150% of Salary) = $225,000 + $337,500 = $562,500/2,000 hours = $281.25 hourly cost. $281.25 x 1.20 = $337.50/hour billing rate.
Steve's billing rate = Annual Salary + Overhead (150% of Salary) = $121,500 + $182,250 = $303,750/1,800 hours = $168.75 hourly cost. $168.75 x 1.20 = $202.50/hour billing rate.
Predetermined overhead rate = Estimated overhead / Estimated allocation base. Hourly cost = (Annual salary + overhead)/estimated hours. Billing rate = hourly cost plus markup of 20%.
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