472 Part 2 Management Accounting The branch manager is pleased that the report shows a $1,461 profit instead of the expected loss of $375. Required: What questions can be raised about the performance of the Eastside Branch and its man- ager based on information in the report? Case was also or noon-3:00 Rosema volume nec or two priv ing the prin A few clie scheduled Some of th of them h classes wer ever, Kate effective Rosemary ness would As the Rosemary Case 15-1 Private Fitness, LLC* "I don't know how much money I might have lost two young children. Private Fitness had been operat- because of Kate. She is a long-time friend whom 1 ing for six months. thought I could trust, but I guess that trust was mis- To open the club, Rosemary had to use almost all of placed. Now I've got to decide whether or not to her personal savings, plus she had to take out a bank fire her. And then I've got to figure out a way to loan. The building Rosemary rented, located in a con- make my business work effectively without my hav- venient strip mall with ample parking, had formerly ing to step in and do everything myself." been operated as a fresh food market. Rosemary spent Rosemary Worth was talking about the consequences about $150,000 to renovate the facility and to buy the of a theft that had recently occurred at the business necessary fitness equipment. The club was comprised she owned, Private Fitness, LLC. Private Fitness was of five areas: an exercise room, a room containing aer- a small health club located in Rancho Palos Verdes, obic equipment (e.g., treadmills, stair climbers, sta- California, an upscale community located in the Los tionary bicycles, cross country ski machines), a room Angeles area. The club offered personal fitness train- containing weight machines and free weights, men's ing and fitness classes of various types, including and ladies' locker rooms, and an office. aerobics, spinning, body sculpting, air boxing, kick- Rosemary contracted with five instructors whom boxing, hip hop, step & pump, dynamic stretch, Pi- she knew to run the classes and training sessions. The lates, and yoga. Personal training clients paid $50 per instructors were all capable of running personal train- hour for their instructor and use of the club during ing sessions, but the each tended to specialize in prime time. During slower times (between 9:00 a.m. teaching one or two types of fitness classes. Rosemary and 4:00 p.m.) the price was $35 per hour. The price herself ran most of the spinning classes and some of per student for each hour-long fitness class was $12. the aerobics classes. The instructors were paid on com- Some quantity discounts were offered to clients who mission. The commission, which ranged between 20 prepaid. Unlike the large health clubs, Private Fitness percent and 50 percent of revenue, varied depending on did not offer memberships for open access to fitness the instructor's experience and on whether the instruc- equipment and classes. tor brought the particular client to Private Fitness, Prior to starting Private Fitness, Rosemary had As manager of the business, Rosemary hired Kate been working as an aerobics instructor and fitness Hoffman, one of the instructors and a long-time model. She had won many local fitness competitions friend. Kate's primary tasks included marketing, fa- and was a former finalist in the Ms. Fitness USA cility up-keep, scheduling of appointments, and competition. She wanted to go into business for her- record keeping. Kate was paid a salary plus a com- self to increase her standard of living by capitalizing mission based on gross revenues. During normal on her reputation and knowledge in the growing fit- business hours when Kate was teaching a class, one ness field and to have more time to spend with her of the other instructors, or sometimes part-time clerical employee, was asked to staff the front desk in return for an hourly wage. Private Fitness was open * Copyright by Kenneth A. Merchant from 5:30 a.m.-9:00p.m., Monday through Friday. It stealing came to th but she not contained Kate denie Rosemary appeared bank. W check, oth classes, of Rosema casual con the instru some surg that Kate who was riod on M doing the Chapter 15 The Nature of Management Accounting 473 was also open from 6:00 a.m-noon on Saturday and checked the records and found no new revenues noon 3:00p.m. on Sunday, recorded because of this new client. She decided to Rosemary was still in the process of building the come to the club during the 1:00-2:00 hour to see if volume necessary to operate at a profit. Typically one this client was indeed working out. Since the client or two private fitness clients were in the facility dur- was there and no revenue entry had been made, she ing the prime early morning and early evening hours. confronted Kate. After first explaining that she had A few clients came in at other times. Classes were not yet gotten around to making the bookkeeping scheduled throughout the times the club was open. entry, Kate finally admitted that this client had been Some of these classes were quite popular, but many writing her checks out to Kate directly, in exchange of them had only one or two students, and some for a discount. Kate said that she was very sorry and classes were cancelled for lack of any clients. How that she would never be dishonest again. ever, Kate's marketing efforts had been proving to be Rosemary realized she had two major problems. effective. The number of clients was growing, and First, she had to decide what to do with Kate. Kate Rosemary hoped that by the end of the year the busi- was a valuable instructor and a long-time friend, but ness would be earning a profit. her honesty was now in question. Should she forgive As the quote cited above indicates, however, Kate or fire her? Second, Rosemary also realized that Rosemary gradually realized that Kate Hoffman was she had an operating problem. She did not want to stealing from the club. One time when Rosemary step in and assume the managerial role herself be- came to the club she noticed $60 in the cash drawer, cause she had significant family responsibilities to but noticed when she was leaving that the drawer which she wanted to be able to continue to attend. contained only $20. She asked Kate about it, and But how could she ensure that her business received Kate denied that there had been $60 in the drawer. all the revenues to which it was entitled without Rosemary wondered if other cash amounts had dis- being on-site at all times herself? Should she leave appeared before they had been deposited into the Kate, who promised not to steal again, in the man- bank. While some clients paid by credit card or ager position? Or should she hire one of the other in- check, others, particularly those attending fitness structors, or perhaps a non-instructor, to become the classes, often paid with cash. manager? And in either case, were there some proce- Rosemary became very alarmed when, during a dures or controls that she could use to protect her casual conversation with one of the other instructors, business's assets? the instructor happened to mention to Rosemary some surprising "good news." The good news was that Kate had brought in a new private fitness client Question who was working out in the 1:00-2:00p.m. time pe- riod on Monday, Wednesday, and Friday. Kate was What should Rosemary do? doing the training herself. However, Rosemary