Question

Business Decision Case

The Reserve Club is a traditional private golf and country club that has three different categories of memberships: golf, tennis & swimming, and social. Golf members have access to all amenities and programs in the Club, Tennis & Swimming members have access to all amenities and programs except use of the golf course, and Social members have access to only the social activities of the club, excluding golf, tennis, and swimming. All members have clubhouse privileges, including use of the bar and restaurant, which is operated by an outside contractor. During the past year, the average membership in each category, along with the number of club visits during the year, was

Members Visits

Golf. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260 9,360

Tennis & Swimming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 1,500

Social . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 2,160

Some members of the Club have been complaining that heavy users of the Club are not bearing their share of the costs through their membership fees. Dess Rosmond, General Manager of the Reserve Club, agrees that monthly fees paid by the various member groups should be based on the annual average amount of cost-related activities provided by the club for the three groups, and he intends to set fees on that basis for the coming year. The annual direct costs of operating the golf course, tennis courts, and swimming pool have been calculated by the Club’s controller as follows:

Golf course. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $900,000

Swimming pool. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000

Tennis courts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000

The operation of the bar and restaurant and all related costs, including depreciation on the bar and restaurant facilities, are excluded from this analysis. In addition to the above costs, the Club incurs general overhead costs in the following amounts for the most recent (and typical) year:

General Ledger Overhead Accounts Amounts

Indirect labor for the Club management staff (the general manager, assistant general manager, membership manager, and club controller). . . . . . . . $250,000

Utilities (other than those directly related to golf, swimming and tennis). . . . . . . . . 24,000

Website maintenance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000

Postage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5,000

Computers and information systems maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . .7,500

Clubhouse maintenance and depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30,000

Liability insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4,000

Security contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12,000

Total ………………………………………………………………………………$334,500

Dess believes that the best way to assign most of the overhead costs to the three membership categories is with an activity-based system that recognizes four key activities that occur regularly in the club: Recruiting and providing orientation for new members Maintaining the membership roster and communicating with members Planning, scheduling and managing Club events Maintaining the financial records and reporting for the Club

Required

a). Identify and explain which overhead costs can reasonably be assigned to one or more of   the four key activities and suggest a basis for making the assignment.

b). Identify a cost driver for each activity cost pool that would seem to be suitable for assigning the activity cost pool to the three membership categories.

c). Suggest a method for assigning any overhead costs to the three membership categories that cannot reasonably be assigned to activity pools.

d). Comment on the suitability of ABC to this cost assignment situation

Answer 1

a) Certain costs like depreciation insurance , website maintainence and postage has to be apportioned on the basis of usage that is total number of members. Costs like computers information system and maintainence are more relevant for areas like socials.

b) The following costs can be Assigned as follows-

Indirect labor for the Club management staff (the general manager, assistant general manager, membership manager, and club controller)- this can be assigned on the basis of time spent in different departments ( Golf course, swimming pool ) or on the basis of total number of visits for each department

Utilities (other than those directly related to golf, swimming and tennis).- This can be divided on the basis number of member visits .

Website maintenance, Postage ,Computers and information systems maintenance- These costs can be divided on the basis of total number of members

Clubhouse maintenance and depreciation- On the basis of area coverage of the respective facilities

c) All the overhead costs can be divided on the basis of total number member visits. Also since the members of golf course are eligible to use other amenities as well so the costs of other amenities should be apportioned to golf course membership fees.

Memeber visits = total number of visits *Total number of visits per year

Golf. 260 members 9,360 visits = 260*9360=2433600

Tennis & Swimming 50 1,500 = 75000

Social . .. . 120 2,160 = 259200

total = 2767800 Member visits

D) Suitabiltiy of Activity based costing in this situation

1) A proper distinction would be made between Cost behavior patterns.

2) An appropriate cost driver identified would be helpful for controlling various uneccesary costs incurred.

3) Each divisions performance would be measured more appropriately and this would be helpful for better management evaluation and decision making .