This paper examines accounting for decision making through three distinct case studies: Shelter Partnership (a non-profit organization), Prestige Telephone Company and its subsidiary Prestige Data Services, and Body Glove, a wetsuit manufacturer. For Shelter Partnership, the paper evaluates cost objects, critiques the accuracy of the existing financial statements, and addresses concerns about in-kind contributions and insurance accounting. For Prestige Telephone Company, it identifies accounting irregularities in quarterly reporting, calculates a monthly breakeven point, and models the impact of four pricing and demand scenarios. For Body Glove, it discusses the purposes of the budgeting system, key events in the budgeting cycle, and recommends changes to accommodate growth.
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 are measured in order to determine net income or profit margins. However, as Shelter Partnership is a non-profit, the cost information forms a basis for the allocation of resources and assists with decisions about scaling. The cost information of Shelter Partnership 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 contributions).
Shelter Partnership cost objects. The cost objects for 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 costs should be separately measured for each object (Averkamp, 2011).
Shelter Resource Bank cost objects. The cost object for the Shelter Resource Bank consists of the direct material assistance provided to the homeless shelters.
Where overhead and administrative costs are shared, the percentage of costs should be allocated to the objects according to use or consumption (Averkamp, 2011).
Schwartz did not organize the financial accounts separately for the Shelter Partnership 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 the percentages of overhead costs attributed to 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, better suiting 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. Schwartz's method of consolidating all revenue into one category does not serve the agency well (Martin, 2010).
Schwartz's financial statement, as categorically expressed, is an amalgamation of 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 has lumped all costs for all regular employees together. Schwartz has identified specific personnel costs by role for the independent contractor positions, and this should also be done for the regular employees, if not on the financial statement, then on the annual budget.
Schwartz's approach is not internally consistent on the financial statement: if personnel salaries are grouped, then independent contractor wages should also be grouped. Furthermore, costs of benefits and payroll tax expenses (PTE) should not be rolled into the salaries line on the budget, as the case study narrative indicates. Benefits are often renegotiated and PTE can vary across fiscal periods, so both items should be segregated, as they have been on Schwartz's statement — at least for some of the staff.
Schwartz is right to be concerned about her accounting for both the warehouse space and the cost of insurance for the Resource Bank.
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. 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 prompt lenders to question the organization's financial picture, which is generally not a desirable outcome.
There is a substantive difference between what was allocated on the budget ($8,000) for insurance and the amount 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 sound cost accounting and to support budget decisions, the insurance costs of the Shelter Partnership and those of the Shelter Resource Bank should be kept discrete. Particularly important is a clear accounting of the cost of automobile insurance and insurance covering those individuals involved in the loading and unloading of the truck.
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 carry a business insurance premium covering office equipment, liability insurance for Officers and Directors, and an insurance umbrella covering any liabilities that might arise from carrying out the duties and responsibilities of the business — much of which takes place in community settings. The liability umbrella should be written to cover both the Shelter Partnership and the Shelter Resource Bank, or two separate policies should be written. Regardless of policy type, there are likely to be discounts for multiple policies, which have been known to reduce overall insurance costs compared to a single-policy approach.
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, 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 Services 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: January net income = $53,528; February net income = $54,659; March net income = $73,562. Accrued depreciation costs would be shown over the period of depreciation in a contra asset account, Accumulated Depreciation.
The cost to rent space is an expense to Prestige Data Services but is revenue for Prestige Telephone Company. As such, it should be deducted from 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.
Since service is made available to commercial customers for 24 hours each weekday and 8 hours each Saturday, it does not make sense to include these available service hours in the calculations for 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 discernible and attributable. If the contractor providing the computer service and maintenance cannot be held to a half-day Saturday schedule, the company should consider engaging a different contractor.
"Breakeven formula and four pricing scenario outcomes"
"Seasonal production cycles and budget monitoring process"
"Budget improvements and product-line cost tracking"
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