Question

An advertising company uses flexible budgeting for both planning and control. One of the company's clients has asked to prepare an advertising campaign for a new product. The contract calls for paying the advertising company - 120 per design hour in the range from 150 to 200 hours. The advertising company has a staff of campaign designers. Customers are billed only for the time designers work on their project. Partner time is not billed directly to the customer. As part of the planning process, the partner in charge of the customer account prepared the following flexible budget. 'Authorized Design Hours' is the estimated range of time the advertising company expects the job to require and what the client agrees to authorize. The executive committee approved the budget and the contract with the client. After some preliminary work, the client liked the ideas so much that the authorized time range was expanded to be between 175 and 250 hours. Flexible budget regarding the client Authorized Design Hours Fixed component Var. Components 150 175 200 fo £1,700 Revenues Design Labor Artwork Office cost Total cost Budgeted profit £ 120 £ 45 £11 £6 £62 £ 18,000 £6,750 £ 3,350 £ 900 f 11,000 £7,000 £21,000 £7,875 £ 3,625 £ 1,050 f 12,550 £8,450 £24,000 £9,000 £ 3,900 £1,200 f 14,100 £ 9,900 £o £1,700 After having finished the project 220 design hours were billed to the client at the contract price (£ 120 per hour). Finally, the following revenues and costs had been accumulated: Actual Costs Incurred Revenue (£ 120 x 220) Design Labor Artwork Office costs Total costs Profits £ 26,400 £ 10,320 £ 4,350 £ 1,690 £ 16,360 £ 10,040 The accounting manager keeps track of actual costs incurred on each account. The average salary for the designers in the advertising company is £ 45 per hour. The actual design labor costs charged to each project are the actual hours times the designer's actual hourly cost. Artwork consists of both in-house and out-of-house artists. Office costs consist of a charge per designer hour to cover rent, photocopying etc. Required: 1. Prepare a table and a short memo that reports the performance of the project concerning the client.

Answer 1

As per the data mentioned, the ideal calculation should be as below-

Revenue	26400 (120*220)
Design labour	9900 (45*220)
Artwork	4120 ((11*220)+1700)
Office cost	1320 (6*220)
Total costs	15340
Profits	11060

Since design labour cost is 10320, 420 has been paid as Overtime. Alternatively, certain work could have been outsourced too.

Artwork costs are more by 230 representing extra cost (Overtime) demanded by out-of-house artists

Since more no. of hours were put in, the office costs have risen