Small World Advertising is an advertising and public relations agency located in Portland, Oregon. This small ad agency, whose mission is to help for-profit 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 benefits are provided to help retain these talented professionals, and cost of benefits averages 40 percent of compensation for all employees. Small World Advertising’s direct professional labor budget is as follows:

Partner salaries	$	200,000
Partner benefits (40%)		80,000
Total partner compensation	$	280,000
Artistic and communications associate salaries	$	300,000
Associate benefits (40%)		120,000
Total associate compensation	$	420,000

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 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 × 90%)		1,080
Associate support ($2,000 × 120%)		2,400
Total cost	$	8,480

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:
Suppose the firm used a single cost driver, total staff compensation, to apply overhead costs to each advertising engagement.

Required:
1. Compute the total budgeted staff compensation: both partner and associate staff compensation.

2. Compare the applied overhead using the single cost driver with the applied overhead computed using the two cost drivers used in the question data.

Applied overhead using the single cost driver ?

Applied overhead using two cost drivers   ?

Answer rating: 100% (QA)

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