Question 1: Service Costing & ABC  Part A African Adventure Ltd offers a series of holiday packages aimed at families, seniors, and  corporate groups. The financial controller is preparing for the annual board meeting and is  concerned about the loss the business sustained in the past year. He has examined the profits  for each of the three departments of the business and it seems that the corporate department is  the source of the problem. The financial controller looked at the three packages offered by the corporate department to  establish which are profitable or not profitable. The sales and direct cost of each package for the  last year are as follows: South Africa Egypt Namibia Number of packages sold 10 20 10 Number of people per package 5 6 8 Revenue per person $18,000 $12,000 $14,000 Direct cost per package:  Tour leader $5,000 $12,000 $9,000  Tour assistant $2,000 $3,000 $6,000  Air travel $28,000 $30,000 $32,00  Accommodation $15,000 $26,000 $24,000  Equipment hires $4,000 0 $9,000  Meals $18,000 $15,000 $8,000 To calculate the profitability of each package, a proportion of the overhead costs of running the  corporate department needs to be allocated to the three packages in proportion to actual sales  revenue. For the last year these overhead costs were as follows: $ Salaries 200,000 Phone 2,000 Depreciation on Equipment 5,000 Utilities 2,000 Rent 9,000 Other department costs 12,000 Total 230,000 Required: (i) Calculate the profit per package and the total profitability of each of the three corporate  packages. (ii) Compare the profitability of the three corporate packages. (iii) Do you consider that the allocation of the corporate department overhead using actual  sales revenue as appropriate? Can you suggest a better method?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question

Question 1: Service Costing & ABC 
Part A
African Adventure Ltd offers a series of holiday packages aimed at families, seniors, and 
corporate groups. The financial controller is preparing for the annual board meeting and is 
concerned about the loss the business sustained in the past year. He has examined the profits 
for each of the three departments of the business and it seems that the corporate department is 
the source of the problem.
The financial controller looked at the three packages offered by the corporate department to 
establish which are profitable or not profitable. The sales and direct cost of each package for the 
last year are as follows:
South Africa Egypt Namibia
Number of packages sold 10 20 10
Number of people per package 5 6 8
Revenue per person $18,000 $12,000 $14,000
Direct cost per package:
 Tour leader $5,000 $12,000 $9,000
 Tour assistant $2,000 $3,000 $6,000
 Air travel $28,000 $30,000 $32,00
 Accommodation $15,000 $26,000 $24,000
 Equipment hires $4,000 0 $9,000
 Meals $18,000 $15,000 $8,000
To calculate the profitability of each package, a proportion of the overhead costs of running the 
corporate department needs to be allocated to the three packages in proportion to actual sales 
revenue. For the last year these overhead costs were as follows:
$
Salaries 200,000
Phone 2,000
Depreciation on Equipment 5,000
Utilities 2,000
Rent 9,000
Other department costs 12,000
Total 230,000
Required:
(i) Calculate the profit per package and the total profitability of each of the three corporate 
packages.
(ii) Compare the profitability of the three corporate packages.

(iii) Do you consider that the allocation of the corporate department overhead using actual 
sales revenue as appropriate? Can you suggest a better method?

Expert Solution
steps

Step by step

Solved in 3 steps with 5 images

Blurred answer
Follow-up Questions
Read through expert solutions to related follow-up questions below.
Follow-up Question

How do I calculate the overhead allocations?

Solution
Bartleby Expert
SEE SOLUTION
Similar questions
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education