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ACC7003 – Case Study

Case Study

Olympiad Health Club

Background

Olympiad Health Club (Olympiad) was established about fifteen years ago with the aim of providing sustainable health services to people in the nearby communities. Olympiad's initial funding came from a small group of investors, who contributed a total of £125,000 at that time, to run three specific services/facilities, namely, aerobic, weight clinics, and swimming. The club has steadily gained in popularity as the residents in the neighbouring areas became increasingly health conscious. To meet the increased customer demand ever since its establishment, Olympiad soon shifted its premises to a much larger facility where it could serve more customers. Gradually, it began offering additional health services including Tai Chi, diet counselling, and Pilates in response to customer demand.

When its cash ran low three years ago, the club took out a small loan. Ms. Mary Brennan, Administrator of Olympiad, realized that the loan would need to be repaid soon; hence, she intended to make the club self-sufficient as soon as possible. After a series of discussion with the current investors and directors of the club, she has laid out two strategies to focus on: to figure out the less profitable services being offered by Olympiad so that appropriate decision can be taken regarding pricing of such services; and to offer nutritional diet packs to individual customers to enhance cash flows and profitability.

Olympiad's most recent financial statements are contained in Table 1.

Table 1. Financial Statements for 2021

a) Balance Sheet As of December 31 2021

b) Income Statement for the year ending December 31, 2021

Concerns regarding accounting system

In January 2020, Ms. Brennan expressed concern about Olympiad's cost accounting system. The extensive growth in membership that Olympiad had seen during its early years was levelling off, and Ms. Brennan wanted to prepare the club to become profitable, yet she lacked critical cost information.

At a meeting with Mr. Joe Smith, Olympiad's new accountant, Ms. Brennan 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. Brennan had an added motivation for analysing Olympiad's costs. Some new health clubs were competing for Olympiad’s clients. To make sure that clients felt they were not being overcharged, Olympiad'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, Pilates, Weight Clinic, Swimming, Tai Chi, and Karate. In addition, the club had a Training and Education (T&E) department (which saw no clients) and a Client Records department.

Tai Chi 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 Karate service was for clients who Olympiad felt were not ready for vigorous activities. Pilates were a relatively new treatment for individuals with high stress.

Existing Information System

Olympiad'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.

Table 2. Costs and Customer Visits for the Year 2021, by Department

* Includes materials, supplies, depreciation, contracted services, and other non-personnel expenses

In reviewing this method with Mr. Smith, Ms. Brennan 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 Olympiad's departments:

“ You have to consider that our overhead costs, like administration and rent, need to be included in the cost per visit. That's 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, for example. There are three counsellors in that department, all earning the same salary. But one works exclusively for the Weight Clinic, while 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 Tai Chi Department, the situation is more complex. We have two part-time experienced trainers, each earning £21,000 a year, and one part-time inexperienced trainer earning £11,000. The two experienced trainers yearly see about 1,500 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. Smith 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 £12.14.

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

Future projections

As Ms. Brennan 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. Smith to prepare a stepdown analysis for the prior year so they would know Olympiad's costs for each department. She planned to use this information to assist her in projecting costs for the remainder of the year.

Nutritional offerings to customers

One of the most frequent feedbacks received from customers pertained to unavailability of healthful ready-to-eat food at Olympiad. Though external providers had installed a number of vending machines within the premises of Olympiad, these machines only offered hot or cold drinks. A genuine need to provide customers with a healthy snack option had long been felt and this need was further pronounced due to customer feedback. So Ms. Brennan is keen to provide ready-to-eat food option to the customers by May 2022. Considering limited seating availability and busy schedule of customers, it was expected that any food pack being offered to customers would be on a take-away basis.

For this purpose, a customer survey was conducted for dietary preference of customers and it was found that majority of customers were interested in nutritional value rather than variety of food. So it has been decided that for the first week of May,  one single packet of ready-to-eat food was to be offered to customers. The possible ingredients for the food pack and expected price and nutritional value per unit for each ingredient is as shown in Table 4.

Based on the response received from customers, Mr. Smith provided further information related to dietary requirements:

Our customers were found to be very focussed on healthy lifestyle, as expected. They attach a lot of importance to consuming at least five portions of fruits/vegetables a day. However, they are also very keen to consume either meat, fish or poultry on a daily basis. As such, any food we provide to our customers need to include at least five portions or units of vegetables/fruits and one portion of either meat, fish or poultry. The key is to strike the right balance and this has been confirmed by our customer survey.