Problem - Job costing; department overhead cost allocation: tour operator
Asian Adventure Holidays offers a series of holiday packages aimed at families, seniors and corporate groups. The financial controller, Jack Tallis, is preparing for the annual board meeting and is concerned about the loss that the business sustained in the past year. He has examined the profits for each of the three departments of the business-family, seniors and corporate-and it seems that the corporate department is the source of the problem.
Jack has asked you to assist him to look more closely at the three packages offered by the corporate department to see which holiday packages are yielding profits and which are not. The three packages are to Thailand, Malaysia and Indonesia. The sales and direct costs of each corporate packages for last year are as follows:
|
|
Bali Adventure
|
Thailand Discovery
|
Malaysian Orienteering
|
|
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
|
32,000
|
|
Accommodation
|
15,000
|
26,000
|
24,000
|
|
Equipment hire
|
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. Jack has suggested that these costs could be allocated to each package in proportion to actual sales revenue. For last year these overhead costs were as follows:
|
Salaries
|
$200,000
|
|
Phone
|
2,000
|
|
Depreciation on equipment
|
5,000
|
|
Utilities
|
2,000
|
|
Rent and taxes
|
9,000
|
|
Other department costs
|
12,000
|
|
Total
|
$230,000
|
Required -
1. Calculate the profit per package and the total profitability of each of the three corporate packages.
2. Compare the profitability of the three corporate packages.
3. Do you consider that the allocation of department overhead to packages using actual sales revenue is appropriate? Can you suggest a better method?
4 Suggest what actions the company could take in regard to the three corporate packages.