Eventus, a corporate incentive company, which organizes corporate team-building

Question

Eventus, a corporate incentive company, which organizes corporate team-building special events and ‘weekend-away’ packages, has prepared a cost estimate for one of its clients, Carlson Group. The aim of the weekend team-building event would be to incentivize the performance of Carlson Group's line managers. The estimate was prepared by the marketing manager of Eventus and has been submitted to you, the management accountant, for approval:

Marketing manager's cost estimate for Carlson Group client

Note Type of cost £

(i) Trainer fees 2,500

(ii) Hotel accommodation costs 3,500

(iii) Coach running costs 800 (iv) Driver costs 600

(v) Training brochures 1,500

(vi) General overheads 1,300

Total costs 10,200

10% profit mark-up 1,020

Selling price quote 11,220

To your mild irritation, the cost estimate has not been based on a relevant costing analysis, but the marketing manager insists he will give a fair price, to win the business from Carlson Group. You have requested more information about each of the costs (as shown below in notes (i) to (vi)) and are determined to come up with a correct costing and price, before the next management meeting.

i) The company employs a specialist management trainer, who will have to be diverted from other work for a charitable organization, to which she had been assigned for the same weekend. This charity client which would have earned the company a contribution of £4,000 overall. The trainer's fee is a flat fee of £2,500 for three days of weekend work. Because of her specialist skills, it was felt that it was better to cancel the charity client rather than attempt to source another Eventus trainer or hire in a trainer from another competitor training company.

ii) The hotel costs are the expected outlay costs of hiring the hotel rooms for the corporate teambuilding weekend.

iii) The coach is owned by Eventus and the variable costs of fuel are £500 for the weekend, plus an amount of £300, which is an apportionment of the annual fixed costs of operating the coach. It is estimated that the only specific fixed costs that would be incurred for the Carlson Group weekend would be special insurance, costing £120.

iv) The driver costs (of £600) represent the salary and related employment costs of hiring the driver for the three days of the weekend. The driver is thinking of retiring and has offered to do the work, only if the company pays a bonus of £500. This bonus is not included in the estimate. Should the company not pay the bonus, the replacement cost to the company of getting another driver would be £1,300.

v) The general training brochures are already in stock and did cost £1,500 to produce and if not used for this client, because of a need to upgrade the content, have no other use and so would have to be scrapped, at a cost of £500 due to recycling requirements.

vi) The general overheads are computed using an overhead absorption rate set annually at the beginning of the year. The only general overhead cost that will be specifically incurred for this client's weekend package is the administrative and marketing staff's time spent in preparing the quote and organizing the accommodation, trainer and events. This amounted to £600.

Required:

As the management accountant of Eventus, derive the cost estimate and selling price quote for the Carlson Group client, by using relevant cost principles. Show all workings and state all your assumptions clearly.

Explanation / Answer

Statement of Relevant Cost Total(£)

1.  Trainer cost = 2500 + Controbution to be lost from charity event =4000 6500

2. Hotel accomodation cost 3500

3. Coach fuel cost = 500 + Insurance =120 620

4. since driver is permanent only bonus will be included 500

5. Realisable value from training brochures 500

6. specific general overhead 600

Total Cost 12220

Add : Mark up 10 % 1222

Selling price 13442

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