Prime Personal Trainers is a personal training service in Belgium for people who want to work out at home
Question 2
Prime Personal Trainers is a personal training service in Belgium for people who want to work out at home. Prime offers two different types of services: Setup and Continuous Improvement. Setup services consist of several home visits by a personal trainer who specialises in determining the proper equipment for each client and helping the client set up a home gym. Continuous Improvement services provide daily, weekly, or biweekly home visits by trainers.
Prime’s accountant wants to create a job costing system for Setup services. She decides to use direct labour cost as the allocation base for variable overhead costs, and direct labour hours for fixed overhead cost. To estimate normal capacity, she calculates the average direct labour cost over the last several years. She estimates overhead by updating last year’s overhead cost with expected increases in rent, supervisor’s salaries, and so on.
Following are her estimates for the current period:
Direct labour hours (based on 250 normal hours per month) 3000
Inventories consist of exercise equipment and supplies that are used by Prime for new clients. The following information summarises operations during the month of October.
A number of new jobs were begun in October, but only two jobs were completed: Job 20 and Job 22.
Account balances on October 1:
Equipment and supplies (raw materials) $ 5000
Client contracts in process (Job 20) 3500
Client contracts in process (Job 22) 1500
Purchases of equipment and supplies:
Equipment $ 54 000
Supplies 500
Total $ 54 500
Equipment and supplies requisitioned for clients:
Job 20 $ 1 000
Job 21 500
Job 22 4 000
Job 23 5 000
Other jobs 40 000
Indirect supplies 500
Total $ 51 000
Direct labour hours and cost:
Hours Cost
Job 20 10 $ 250
Job 21 18 450
Job 22 15 375
Job 23 6 150
Other clients 180 4 500
Total 229 $ 5 725
Labour costs:
Direct labour wages $ 5 725
Indirect labour wages (160 hours) 1 920
Manager’s salary 6 250
Total $ 13 895
Office costs:
Rent $ 1 000
Utilities 100
Insurance and taxes 900
Miscellaneous 1 000
Total $ 3 000
REQUIRED:
a) What are the estimated allocation rates for fixed and variable overhead for the current period?
b) What is the total overhead cost allocated to Job 20 in October?
c) What is the total cost of Job 20?
d) Calculate the amounts of fixed and variable overhead allocated to jobs in October.
e) Why would the accountant choose to use two cost pools instead of one? Will this method make a difference in client bills when the job includes more equipment and less labour than other jobs? Explain.
SHOW YOUR WORKING
Hint
Accounts & Finance "Allocation rate is a percentage of an investor's cash or capital outlay which goes toward a final investment and is most often referred to the amount of capital invested in a product net of any fees which might be incurred through the investment transaction. The dual rate cost allocation method categorizes cost into two types of cost pools: fixed costs and variable cos...
"Allocation rate is a percentage of an investor's cash or capital outlay which goes toward a final investment and is most often referred to the amount of capital invested in a product net of any fees which might be incurred through the investment transaction. The dual rate cost allocation method categorizes cost into two types of cost pools: fixed costs and variable costs. It is also the standard amount of overhead applied to a unit of production or other measure of activity. It is done when shifting costs to a cost object, which can be required under one of the accounting frameworks to ensure if a full cost is applied to inventory. It can also be used as part of an internal accounting effort, to ensure that overhead costs are applied throughout a business.
Therefore,
Overhead allocation rate = Total overhead / Total direct labor hours"
Login | Sign Up
