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In: Accounting

A health clinic that offers both acupuncture and massage therapy treatments : Treatment Type Length of...

A health clinic that offers both acupuncture and massage therapy treatments :

Treatment Type

Length of Time

Price

Private Session - Acupuncture

90 minutes

$160

Private Session - Massage

90 minutes

$160

Direct labour costs are based on the following rates:

Acupuncturist cost

$70 per hour

Massage Therapist cost

$50 per hour

A client, Ashley Ardern, had both Acupuncture and Massage treatments on his back in May 2020: 10 sessions with the Acupuncturist and 6 sessions with the Massage Therapist. Massage oil supplies used in Ashley’s massage sessions were $12 per session.

In addition to allocating direct costs to each treatment client, the clinic’s existing costing system uses a budgeted overhead allocation rate for allocating overheads based on the total number of sessions estimated for the month.

In May 2020, the treatment rooms had a budgeted allocation base of 300 sessions, and total budgeted overheads for the month were $13,000. Within the overhead costs, there is a depreciation charge that is related specifically to the Acupuncture treatment equipment.

The accountant has suggested to the manager of the clinic that they implement a new costing system so the allocation of overheads can better reflect the usage of the treatment resources. Specifically, the accountant pointed out that the acupuncture sessions include the use of acupuncture equipment not used in the massage therapy sessions and therefore the acupuncture equipment overheads should not be charged when the massage therapy session is carried out.

Required:

  1. Calculate the budgeted overhead allocation rate based on the existing costing system in May 2020.
  2. Calculate the profit on Ashley Ardern’s total treatment package based on the existing costing system
  3. Suppose the accountant persuades the clinic manager to implement the new costing system so that the total overhead of $13,000 is separated into three categories and allocated based on the different session types. The details for the new costing system are:
  • $3,000 General overhead allocated based on estimated number of total sessions for the month.
  • $6,000 Acupuncture specific overhead cost pool allocated based on total estimated number of Acupuncture sessions for the month.
  • $4,000 Massage Therapy specific overhead cost pool allocated based on total estimated number of Massage Therapy sessions for the month.
  • The estimate for total sessions in the month of May 2020 remains the same at 300, with 100 sessions estimated for Acupuncture, and 200 sessions estimated for Massage Therapy.

Calculate the following new budgeted overhead allocation rates based on the new costing system for May 2020:

    1. General overhead allocation rate.
    2. Acupuncture overhead allocation rate.
    3. Massage therapy overhead allocation rate.
  1. Calculate the profit on Ashley Ardern’s total treatment package based on the new costing system.
  2. Briefly discuss the profit results in parts b) and d) above and provide a justified recommendation to the management of Total Body Limited on which costing system should be adopted.

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