Accounting for Decision-Making Case Study

Excerpt from Case Study :

Accounting for Decision Making

Shelter Partnership's Case Study

Purposes of Cost Information

The intended purpose of cost information is to provide a basis for determining the expenses and revenues associated with a particular activity (or cost object). Generally, cost and income is measured in order to determine net income or profit margins. However, as Shelter Partnerships is a non-profit, the cost information forms a basis for the allocation of resources and to assist with decisions about scaling. The cost information of Shelter Partnerships can also be used to address any cycles in the stream of donations and contributions that can impact the overall ability of the non-profit to meet its mission. In addition, since Shelter Partnership regularly applies for grant funding, it is essential that their accounting system be readily interpretable to grant reviewing bodies. Fund development cannot be sustained for long in an environment that is only loosely accountable for revenue -- in fact, this is one of the public's most common criticisms of not-for-profit organizations, and it is often their undoing (or at least that of their executive directors). Shelter Partnership must ensure that their books provide an accurate accounting of all operational expenditures and all funds received -- regardless of the source (including "in-kind").

Cost Objects

Shelter Partnership cost objects. The cost objects for the Shelter Partnership include the technical assistance work, the program development work, and the public policy support work. Each of these cost objects has a discrete focus and cost should be separately measured for those objects (Averkamp 2011).

Shelter Resource Bank cost objects. The cost object for the Partnership Shelter Resource Bank consists of the direct material assistance to the homeless shelters.

Where over-head and administrative costs are shared, the percentage of costs should be allocated to the objects according to use or consumption (Averkamp 2011).

Accuracy of Ruth Schwartz' Estimates

Schwartz did not organize the financial accounts separately for the Shelter and the Resource Bank, though they are essentially two distinct business units. The single stage cost accounting system that Schwartz used creates distortions because more than a single activity is occurring under that accounting system and, further, the percentages of over-head costs used for the different activities are not reflected when a single enterprise-wide accounting system is used. The Shelter Partnership has four distinct activities divided across two business units ("Shelter Partnership" 2011). A traditional two-stage cost allocation system of accounting would provide greater accuracy and detail that would better suit the needs of a non-profit that is active in fund development.

Issues about accounting for revenues were addressed in the section on the purposes of cost information. Suffice it to say -- here -- that Schwartz' method of consolidating all revenue into one pot does not serve the agency well (Martin 2010).

Schwartz' financial statement, as categorically expressed, is a bit of an amalgamation between a budget and a financial statement. With personnel as the largest line item, Schwartz should break down that account in more detail, particularly since personnel are shared across the two main business units. She has carefully delineated costs for office expenses -- which are quite minor compared to personnel costs -- but then resorted to lumping all costs for all regular employees together. Schwartz has identified specific personnel costs by role for the independent contractor positions, and this should definitely be done for the regular employees, if not on the financial statement, then on the annual budget. Schwartz's approach is not consistent on the financial statement: If personnel salaries are to be grouped, then independent contractor wages should also be grouped. Also, costs of benefits and payroll tax expenses (PTE) should not be rolled into the salaries on the budget (as the case study narrative indicates). Benefits are often re-negotiated and PTE can vary across fiscal periods, so both of these items should be segregated (as they have been on the Schwartz' statement -- at least for some of the staff).

Addressing "The Concern"

Schwartz is right to be concerned about her accounting for both the warehouse space and the cost of insurance for the Resource Bank.

The warehouse space. It is not good accounting practice to omit from the books a large in-kind contribution to a non-profit (Averkamp 2011). That Shelter Partnership has a business relationship with the General Services Administration (GSA) conveys a level of organizational stability that funders will find appealing. And, as Schwartz appropriately surmised, the warehouse space might qualify as an asset (or a liability, if it is leased space), depending on the agreement with the GSA. Without acknowledging the warehouse space on the budget or the financial statement, Schwartz leaves a large gap that will set lenders wondering -- which is generally not a good thing to do.

Insurance costs. There is a substantive difference between what was allocated on the budget ($8,000) for insurance and the amount that was actually spent ($2,925) on insurance in 1990. Absent designations of insurance costs to the two business units, it is unclear what accounts for this difference. For simple cost accounting, and to support budget decisions, the insurance costs of the Shelter Partnership and those of the Shelter Resource Bank should be discrete. Particularly important is a clear idea of the cost of automobile insurance and insurance that covers those individuals involved in the loading and unloading of the truck.

Certainly the total premium for Shelter Partnership should not be driven by the Resource Bank, as attributed to Schwartz in the narrative. It is reasonable to expect that the Shelter Partnership will have a business insurance premium that covers office equipment, liability insurance covering Officers and Directors, and an insurance umbrella that covers any liabilities which might occur as a result of carrying out the duties and responsibilities of the business, much of which takes place in community settings. The liability umbrella ought to be written to cover both the Shelter Partnership and the Shelter Resource Bank, or two separate policies should be written. Regardless of policy types, there are likely to be discounts for multiple policies, which have been known to reduce overall insurance costs over a single policy approach.

Prestige Telephone Company

Results of Operations

Depreciation. An accounting irregularity can be seen in the method used for quarterly reporting of depreciation. The computer leasing cost should not appear as a lump sum on the quarterly report. Office equipment, such as computers and servers and peripheral equipment, is depreciated, and it is the depreciated amount -- as determined by the selected depreciation schedule -- that is entered in the reports for the period. Since the quarterly report format used by Prestige Data Service shows three separate months, the depreciation amount in each column will be 1/12 of the annual depreciation cost. Assuming that the $26,500 depreciation cost is accurate, the $95,000 cost of the computer leases would not be listed as a monthly expense on the quarterly report. Correcting this error would result in a positive balance for each month, accordingly: January net income = $53,528; February net income = $54,659, March net income = $73,562. Accrued depreciation costs would actually be shown over the period of depreciation in a contra asset account, Accumulated Depreciation.

Rental space. Further, the cost to rent space is an expense to Prestige Data Services, but it is revenue for Prestige Telephone Company. As such, it should be deducted from the overall net income (for purposes of analysis, not in actuality) when considering the real costs of operations. It is wholly appropriate for the subsidiary journals to show the cost of rent, but it may be an arbitrarily assigned cost if the building space is owned by Prestige Telephone Company. In that case, it is fair to assume that costs for utilities and maintenance should reasonably be charged to the subsidiary, but a direct expense for leased space may be a burden unfairly charged against the profit margin. Should Prestige Telephone Company elect to maintain the space rent arrangement with its subsidiary, it would be appropriate for the two entities to establish a consolidated income statement that accurately shows revenue derived from Prestige Data Services.

Available service hours. Since service is made available to commercial customers for 24 hours each weekday and for 8 hours each Saturday, it does not make sense to include the service hours in the calculations for the total revenue hours. Not only should this figure be listed separately, but any variation from month to month -- prorated by the number of days in the month -- should be discernable and attributable. If the contractor providing the computer service and maintenance cannot be held to a half-day Saturday and Sunday schedule, the company should consider hiring a different contractor.

Monthly Breakeven

The commercial sales of computer use would need to approach 224 hours on average each month in order for the Prestige Data Systems business unit to break even (Arsharm 2011). The calculations are as follows:

Where:

Q = Break-even point (units of production)

FC = Fixed Costs

VC = Variable…

Cite This Case Study:

"Accounting For Decision-Making" (2011, June 09) Retrieved August 21, 2017, from
https://www.paperdue.com/essay/accounting-for-decision-making-118580

"Accounting For Decision-Making" 09 June 2011. Web.21 August. 2017. <
https://www.paperdue.com/essay/accounting-for-decision-making-118580>

"Accounting For Decision-Making", 09 June 2011, Accessed.21 August. 2017,
https://www.paperdue.com/essay/accounting-for-decision-making-118580