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Question 1
a) Explain the value chain concept and discuss two (2) ways the value chain concept benefits organisations.
b) Based on the organisation that you have selected, evaluate the organisation using the value chain concept. This explanation should include:
- An identification of the company’s mission and objectives.
- A description of the competitive strategy (i.e. cost leadership, differentiation or focus) of the company.
- Draw the value chain model for the company. i.e. Tailor the model to your company’s operations, identifying its value-adding processes and support departments.
- Choose any 2 value-adding processes of your company from the diagram in (iii), and for each, explain the process. Give some specific examples on what value it contributes to the company’s products/services, leading to business decisions for improving customer and shareholder value.
- Finally, comment on the relevance and usefulness of the information that you find in relation to your theoretical knowledge of the value chain concept.
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 |
| Direct labour cost $75,000 Variable overhead (primarily fringe benefits) | $150,000 |
| Fixed overhead (office related costs) | $120,000 |
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) | $5,000 |
| 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.
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