Question

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 $130,000 to its consultants and incur indirect operating costs of $195,000. Actual consultant labor costs were $145,000 and actual indirect operating costs were $185,000. The cost records for three of Optimum's clients are summarized below: $ Food and nutritional supplements Nutritional counseling ($13 per hour) Personal fitness training ($18 per hour) Indirect operating costs Judy Tom Elizabeth 400 $ 1,200 $ 200 130 260 156 360 540 720 ? ? ?

Answer 1

Requirement 1:

Predetermined overhead rate = Total Estimated Indirect operating cost / Total direct labor cost * 100

Predetermined overhead rate = $195,000 / $130,000 * 100 = 150%

Requirement 2:

Particulars	Judy	Tom	Elizabeth
Food and nutritional supplements	$400	$1,200	$200
Nutritional counseling	$130	$260	$156
Personal fitness training	$360	$540	$720
Indirect operating cost	$735	$1,200	$1,314
Total Cost	$1,625	$3,200	$2,390

Working Notes:

Judy

Indirect Operating cost = ($130 + $360) * 150% = $735

Tom

Indirect operating cost = ($260 + $540) * 150% = $1,200

Elizabeth

Indirect operating cost = ($156 + $720) * 150% = $1,314

Requirement 3:

Particulars	Judy	Tom	Elizabeth
Up-Front fees	$330	$330	$330
Food and nutritional supplements	$480	$1,440	$240
Consulting Services	$1,170	$1,950	$2,028
Total Revenue	$1,980	$3,720	$2,598
Less: Total Cost	$1,625	$3,200	$2,390
Profitability	$355	$520	$208

Working Notes:

1. Food and nutrient supplements

Judy = $400 * 120% = $480

Tom = $1,200 * 120% = $1,440

Elizabeth = $200 * 120% = $240

2. Consulting services

Judy = {($130 / $13) + ($360 / $18)} * $39 = $1,170

Tom = {($260 / $13) + ($540 / $18)} * $39 = $1,950

Elizabeth = {($156 / $13) + ($720 / $18)} * $39 = $2,028

All the best...