Bangor Town Health Club Background Bangor Town Health Club (Bangor Town) was established about ten years ago, at a time when the residents in the neighbouring areas were becoming increasingly health conscious. The club provided comprehensive services to its clients, and had become increasineg popular as health concerns began to dominate the lives of the nearby communities. Bangor Town's initial funding came from a small group of investors, who contributed a total of 125,000. When its cash ran low three years ago, the club took out a small loan Ms. Grace Flynn, Administrator of Bangor Town, realized that the loan would need to be repaid soon; hence, she intended to make the club self-sufcient as soon as possible. Bangor Town's most rec-t financial statements are contained in Table 1. Table 1. Financial Statements for 2019 a) Balance Sheet As of December 31 2019 Assets Cash Accounts Receivable Inventory Furniture & Equipmllt Less: accumulated depreciation Total Liabilities Accounts Payable Accrued wages Bank Loan Equitir Retained Earnings Total b) Income Statement for the year ending December 31, 2019 Revenue from client fees 345,450 Other revenue 5,000 Expenses Program services 235,000 Utilities 10,000 Training and Education 25,000 General and Administrative 92,000 Net income (loss) 350,450 352,000 2 (11,550) T316 101,186 Concerns regarding accounting system In January 2020, Ms. Flynn expressed concern about Bangor Town's cost accounting system. The extensive growth in membership that Bangor Town had seen during its early years was levelling off, and Ms. Flynn wanted to prepare the club to become profitable, yet she lacked critical cost information. At a meeting with Mr. Tom Moore, Bangor Town's new accountant, Ms. Flynn outlined the principal issues: "First of all, our loss is increasing. We obviously have to reverse this trend if we're going to become solvent. But for that we have to know where our costs are. That leads to the second problem: we don't know the cost of each of the services we offer. I mean, our clients receive a variety of services, yet we charge everyone the same per-visit fee." Ms. Flynn had an added motivation for analysing Bangor Town's costs. Some new health clubs were competing for Bangor Town's clients. To make sure that clients felt they were not being overcharged, Bangor Town's fee schedule had to be reasonably related to costs. Organizational Structure The club had 22 paid employees. There were eight activity areas, that the centre sometimes called departments: Yoga, Aerobic Training, Nutrition Counselling, Seaweed/ Mud Soaks, Weight Clinic, Swimming, Nautilus Workouts, and Massage Therapy. In addition, the club had a Training and Education (T&E) department (which saw no clients) and a Client Records department. Nautilus Workout was an activity involving some considerable risk to clients. Hence, it was staffed by two part-time physical therapists and a full-time trainer. The Massage Therapy service was for clients who Bangor Town felt were not ready for vigorous activities. Seaweed mud soaks were a relatively new treatment for individuals with high stress. Existing Information System Bangor Town's previous accountant had established a system to determine the cost per client visit. According to this method, shown in Table 2, the cost was a yearly average for all client visits. The accountant would first determine the direct cost of each activity. He would then add overhead costs, such as administration, rent, and utilities to the total cost of all the activities to determine the Club's total costs. Finally, he would divide the total by the year's number of visits. Increased by an anticipated inflation figure for the following year (usually about 4 to 5 percent), this number became the projected cost per visit for the subsequent year.F}, Table 2. Costs and Customer Visits for the Year 2019, by Department Client visits Yoga 5.000 20.000 8.000 28.000 Aerobic Training 10,000 5,000 15,000 20,000 Nutrition Counselling 2.100 30.000 16.000 46.000 SeaweedlMud Socks 4,000 27,000 6,000 33,000 Weight Clinic 1,400 15,000 8,000 23,000 smashing 1.5 00 5 ,000 3.000 13,000 Nautilus Workouts 2,500 32,000 10,000 42,000 Massage Therapy 6.400 20,000 10.000 30,000 J Subtotal 32,900 154,000 01,000 235,000 -- Administration 33,000 2,000 40,000 Rent 3 6,000 36,000 Utilities 10.000 10.000 Training and Eduanion 16,000 9,000 25,000 Cleaning 6.000 6.000 Record keeping 7,000 3,000 10,000 Total 215.000 147,000 362,000 ' Includes materials, supplies. depreciation, ccl + Fserrices, and other non-personnel eipenses "- a In reviewing this method with Mr. Moore, Ms. Flynn explained the problems she perceived. She said that although she realized this was not a precise method of determining cost for clients, the spa's cost per visit had to be held at a reasonable level in order to keep its services accessible to as many community residents as possible. Additionally, she anticipated complications in determining the cost per visit for each of Bangor Town's departments: \" You have to consider that our overhead costs, like administration and rent; need to be included in the cost per visit. Ihatis easy to do when we have a single cost, but I'm not certain how to go about it when determining costs on a activity basis. Furthermore, it's important to point out that some of our activities provide services to others. Nutrition Counselling, n' example. There are three counsellors in that department, all earning the some salary. But one works exclusivelyir the Weight Clinic, white another divides her time evenly between Aerobic Training and Yoga. Only the third spends his entire time in Counselling, seeing clients who don't need other services. In the Nautilus Department, the situation is more complex. We have two part- time experienced trainers, each earning 12,000 a year, and one pan-time inexperienced trainer earning 8, 000. The two experienced trainers yearly see about I, 500 clients who need general assistance, but they also spend about half of their time in other departments. The inexperienced trainer spends time pretty evenly across all departments. \" Mr. Moore added further dimensions to the problem: "I've spent most of my time so far trying to get a handle on allocating these overhead costs to activities. It's not an easy job, you know. Administration, for example, seems to help everyone about equally, yet I suppose we might say more administrative time is spent in the departments where we pay more salaries. Rent, on the other hand, is pretty easy: it can be done on a square-foot basis. We could classify utilities according to usage if we had meters to measure electricity, phone usage and so forth, but because we don't we have to do that on a square-foot basis as well. This applies to cleaning, too, I guess. It seems to me that record keeping can be allocated on the basis of the number of records, and each department generates one record per client visit. Training and Education (T & E) work is the most confusing. Some departments don't use it at all, while others use it regularly. I guess the fairest would be to charge for T & E on an hourly basis. Since there are two people in the department, each working about 2, 000 hours a year, the charge per hour would be about $4.00. But this is a bit unfair, since T & E also uses supplies, space and administrative time. So we should include those other costs in its hourly rate. Thus, the process is confusing and I haven't really decided how to sort it out. However, I have prepared data on floor space and T & E usage (Table 3). " Table 3. Floor Space and Training & Education (T&E) Usage, by Department Department Floor Space (sq. ft.) T&E Usage (hrs/year) Yoga 1,000 1,000 Aerobic Training 1,300 200 Nutrition Counselling 300 2,400 Seaweed/Mud Soaks 500 100 Weight Clinic 1,000 Swimming 1,800 + Nautilus Workouts 1,100 100 Massage Therapy 1,000 200 Administration 500 Training and Education 1,200 Record keeping 300 Total 10.000 4.000 + y Future projections As Ms. Flynn looked toward the remainder of the year, she realized that she needed a precise cost figure for each activity. The club was growing and she estimated that total client volume would increase by about 10 percent during the year, spread evenly over each department. She anticipated that costs would also increase by about 10 percent over their prior-year levels. She asked Mr. Moore to prepare a stepdown analysis for the prior year so they would know Bangor Town's costs for each department. She planned to use this information to assist her in projecting costs for the remainder of the year.Derive the cost per visit for each activity. taking into account the views expressed by Ms. Flynn and Mr. Moore, and providing relevant discussion. Show your calculations in good form and clearly state any assumptions you may make. [23 Marks] How might the information you derived in (2) above be used by Ms. Flynn? What additional information might she need for management decision purpose? [5 Marks]