Platinum Tracks, Inc., is a small audio recording studio located in Los Angeles. The company handles work for advertising agencies—primarily for radio ads—and has a few singers and bands as clients. Platinum Tracks handles all aspects of recording from editing to making a digital master from which CDs can be copied. The competition in the audio recording industry in Los Angeles has always been tough, but it has been getting even tougher over the last several years. The studio has been losing customers to newer studios that are equipped with more up-to-date equipment and that are able to offer very attractive prices and excellent service. Summary data concerning the last two years of operations follow: 2012 2013
Estimated hours of studio service 1,100 850
Estimated studio overhead cost $95,000 $95,000
Actual hours of studio service provided 1,000 700
Actual studio overhead cost incurred $95,000 $95,000
Hours of studio service at capacity 1,900 1,900
he company applies studio over-head to recording jobs on the basis of the hours of studio service provided. For example, 41 hours of studio time were required to record, edit, and master the Verde Baja music CD for a local Latino band. All of the studio over-head is fixed, and the actual overhead cost incurred was exactly as estimated at the beginning of the year in both 2012 and 2013.
A. Platinum Tracks computes its pre-determined over-head rate at the beginning of each year based on the estimated studio over-head and the estimated hours of studio service for the year. How much over-head would have been applied to the Verde Baja job if it had been done in 2012, 2013?
B. By how much would over-head have been under-applied or over-applied in 2012, 2013?
C. The president of Platinum Tracks has heard that some companies in the industry have changed to a system of computing the pre-determined over-head rate at the beginning of each year based on the hours of studio service that could be provided at capacity. He would like to know what effect this method would have on job costs. How much overhead would have been applied using this method to the Verde Baja job if it had been done in 2012, 2013?
D. By how much would overhead have been under-applied or over-applied in 2012 using this method 2013?