I. CASE FACTS
i. Shelter Partnership, Inc. is a nonprofit organization collaboratively solving homelessness in Los Angeles County through policy analysis, program design, resource development, and advocacy in support of agencies and local governments that serve the homeless. Shelter Partnership was founded in 1985.
ii. The organization provided program development to obtain employment, housing and education, and conducted research in understanding homelessness better.
iii. The direct material assistance was provided to homeless shelters through the Shelter Resource Bank which solicited donations of new/excess inventory from manufacturers/retailers and distributed these goods to the homeless shelters in LA.
II. STATEMENT OF THE PROBLEM
How should Shelter Partnership appropriately account for the rental cost of the warehouse (where Shelter Resource Bank is operating) and insurance costs to meet its desirable budgeted revenues and expenses?
i. To determine how the possible under-costing of one of the organization’s major elements (Shelter Resource Bank) might affect their fund raising.
ii. To re-evaluate the partnerships cost standards (budgeted vs actual)
IV. AREAS OF CONSIDERATION
Product costing, fund raising and sourcing decisions:
i. Personnel expenses have the largest component in the partnership’s expenses.
ii. The partnership used a single stage cost accounting system. All warehouse costs were a direct expense to the Resource Bank. All of the trucking and warehouse temporary labor costs were also considered direct expenses of the Resource Bank.
iii. The partnership’s revenues are stemmed from private (foundations/individual donors) and public sources (public grants).
Shelter Partnership’s products/services:
i . Resource Bank
ii. Technical – fund raising and distribution
iii. Program Development – conferences
iv. Public Policy Support – research studies
*Revenues come from a variety of private and public sources
*Also, the partnership earned a small amount of interest income.
*The largest expenses for the partnership were for personnel
*Actual expenses don’t equal with budgeted expenses
*Possible undercosting of the Shelter Resource Bank
*Showing higher expenses for the resource bank might make some donors more sympathetic with her fund raising efforts for the bank.
*Possible decrease of donations due to high expenses
V. ALTERNATIVE COURSES OF ACTION
Use direct labor hours as the basis for cost allocation.
Retain status quo (single stage cost accounting) and re-evaluate budgeted expenses.
Solicit more donations to cover increasing expenses of the partnership.
Use activity-based costing system
iv. Use activity-based costing system
Currently, Ruth Schwarts uses a single stage cost accounting system and now she wants to identify the actual cost for some of the cost directly incurred one of their operating entity, Shelter Resource Bank. She wants to account for the rental cost of the warehouse where Shelter Resource Bank is operating and insurance cost which was not properly allocated to the Resource Bank as it should be since concerns on safety were more abundant in the warehouse.
The third ACA is recommended for the partnership’s concern on cost allocation. Activity-based costing is an improved method for allocating overhead costs. Instead of using one factor for cost allocation, this new method focuses on different aspects of the production process and allocates the overhead based on each product’s reliance on different overhead aspects. The first stage of allocation determines the cost of each occurrence of an overhead event during the process. The second stage allocates the cost of each occurrence to individual items produced by the business.
VII. ACTION PLAN
Activity-based costing is the newest means of calculating how overhead expenses are allocated to different products at the time of publication. The traditional allocation method requires the business to pick one metric to use as a means to allot overhead costs. Instead of using a single factor, activity-based costing uses several factors to determine how to allocate overhead. Each factor is tied directly to an aspect of overhead. Then each product is evaluated based on how much of each element of overhead is used to produce the good, and the price is adjusted accordingly.