Question

3 Optimum Health Inc. provides diet, fitness, and nutrition services to clients who want a healthier lifestyle. The company customizes a program for each client based on their individual goals that includes diet recommendations (prepackaged food and supplements), nutrition counseling, and guided fitness (personal training). The company uses a modified job order cost system that keeps track of the cost of the food, vitamins, and nutritional supplements the company provides to each client, as well as the amount of time nutrition and fitness consultants spend with each client. Optimum applies all indirect operating costs (e.g., rent, utilities, and management salaries) as a percentage of the consultant's labor cost. During the most recent year, the firm estimated that it would pay $160,000 to its consultants and incur indirect operating costs of $240,000. Actual consultant labor costs were $175,000 and actual indirect operating costs were $230,000. The cost records for three of Optimum's clients are summarized below: JudyTom Elizabeth Food and nutritional supplements Nutritional counseling ($19 per hour) Personal fitness training ($24 per hour) Indirect operating costs $400 S 1,200 S 200 228 960 190 480 380 720 Required 1. Comput e the predetermined overhead rate mined Overhead Rate 150190 2. Determine the total cost of serving each client. Tom Elizabeth Total Cost of Serving 2,0753,95 3,170

Answer 1

Solution 1:

Predetermined overhead rate = Estimated overhead cost / Estimated consultant cost = $240,000 / $160,000 = 150%

Solution 2:

Computation of cost of serving each client
Particulars	Judy	Tom	Elizabeth
Food and nutritional supplements	$400.00	$1,200.00	$200.00
Consultant labor cost:
Nutritional counseling	$190.00	$380.00	$228.00
Personal fitness training	$480.00	$720.00	$960.00
Total consultant labor cost	$670.00	$1,100.00	$1,188.00
Overhead applied (150% of consultant labor cost)	$1,005.00	$1,650.00	$1,782.00
Cost of serving each client	$2,075.00	$3,950.00	$3,170.00

Solution 3:

Computation of profitability
Particulars	Judy	Tom	Elizabeth
Upfront Fee	$360.00	$360.00	$360.00
Charges of food and nutritional supplements (Cost +20%)	$480.00	$1,440.00	$240.00
Charges for consulting:
Nutritional counseling (hours * rate)	$520.00	$1,040.00	$624.00
Personal fitness training (hours * rate)	$1,040.00	$1,560.00	$2,080.00
Total charges from customers	$2,400.00	$4,400.00	$3,304.00
Cost of serving	$2,075.00	$3,950.00	$3,170.00
Profitability from each customer	$325.00	$450.00	$134.00