CHAPTER 17

Shelter Partnership, Inc.

Approach

This case was written to illustrate the use of cost information and cost systems in a nonprofit setting. The case is particularly interesting because managers at Shelter Partnership were actively considering whether the possible undercosting of one of the organization's major elements (Shelter Resource Bank) might be adversely affecting their fundraising.

Suggested Assignment Questions

Suggested questions appear at the end of the case.

Case Analysis

A. What is the main purpose of cost information at Shelter Partnership?

The class should discuss three purposes:

1. Product costing. Managers should know the costs of the different services the organization provides. If the costs of a particular service are judged to exceed value, that particular service can be discontinued.

For example, the Salvation Army managers analyzed the costs of their organization's various programs. They decided to discontinue pick-up service of donated goods at private residences. The cost of doing so was greater than the value of the goods received. Instead, they decided to use donation centers in major traffic areas (which gave them economies of scale).

Students should understand, however, that use of cost information for product costing purposes is limited in Shelter Partnership because this is not a client-supported organization. Most of the revenues come from donations, not sales or service fees, and costing has little to do with pricing.

2. Fund raising. Cost estimates help determine the level of fundraising necessary to support Shelter Partnership's activities. (Note that some students question Ruth Schwartz's assumption that higher costs facilitate fund raising.)

3. Sourcing decisions. Managers can make decisions as to whether to have the organization provide its own services or contract them to outsiders (make or buy).

Cost control purposes seem not to be greatly served by the cost system. Shelter Partnership did not have reliable cost standards, so actuals vs. standards comparisons were not possible. However, some actuals vs. history comparisons were useful.

B. The Shelter Partnership cost system:

C.Shelter Partnership provides four products or services:

a. technical(fund raising and distribution

b. program development(conferences, publicity

c. public policy support(research studies, educational programs

d. Resource Bank

But Ms. Schwartz does not express interest in tracing costs to the individual services, with the exception of the Resource Bank.

D. Is a single-stage cost system appropriate? Why or why not?

The students can quickly identify the cost pools and recognize how the costs are distributed across the difference services. There are three main categories of cost pools: (1) personnel (which includes salaries, benefits, and payroll tax expenses); (2) other operating costs; and (3) independent contractor costs.

Some students will develop systems that add a "first-stage" allocation to the system, in which expenditures from the budget line items are pooled according to a common cost driver. Then they calculate burden rates for each cost pool and assign costs through a second stage allocation down to the cost object (service or program) level. Their cost drivers are commonly labor dollars of the ''personnel pool," and floor space for the "other operating costs" pool, etc. The students will argue that their scheme will make the costs of the various cost objects more "accurate." It is impossible to reach consensus on that, but most students will agree with Ms. Schwartz that Shelter Partnership has no particular need for this level of sophistication.

It would be time-consuming and therefore costly, to identify the activities performed and to attach costs to each of these activities, thereby constructing a true activity-based (2-stage) cost system. The benefits would probably not exceed the costs.

E. How many cost centers should Shelter Partnership identify?

Shelter Partnership uses nine cost centers. There are two personnel cost centers because different categories of people are allocated in different proportions to the Resource Bank. The costs of the donations distribution and solicitation managers and warehouse staff are allocated 100% to the Resource Bank. The costs of the administrative personnel (associate director, development director, office managers, and receptionists) are allocated 50% to the Resource Bank and 50% to the other three services.

Students will question why no personnel costs related to the executive director and program manager are allocated to the Resource Bank. They will also question whether it is desirable to make salary information essentially public by incorporating them into the allocations.

Shelter Partnership uses four costs centers for the other operating costs:

a. Warehouse expenses (100% assigned to the Resource Bank).

b. Office rent, office expenditures, postage, photocopying, printing, telephone, insurance, local travel, community training/board education, training and education, and equipment (50% assigned to the Resource Bank);

c. Nonlocal travel, newsletters, and publications (one-third assigned to Resource Bank);

d. (Not mentioned in text) Professional fees (assigned on a project-by-project basis).

Three cost centers are used for the independent contractor costs:

a. Trucking and warehouse temporary labor costs (traced 100% to the Resource Bank);

b. Accountant expense (50% assigned to Resource Bank):

c. Development consultant (which were zero in 1990) and the temporary consultant (0% to Resource Bank).

Are these enough cost centers? Too many? The discussion should refer back to the purposes of the cost information (Question 1).

F. Are Ruth Schwartz's estimates accurate enough?

This is a difficult question to answer, but it gets students thinking in the right direction. The students realize that Ruth could interview her staff and get better estimates as to how they direct their time toward the four services the organization provides. They also realize that, for the personnel and independent contractor expenses, the allocation bases (which map directly into the percentages) are labor hours, measured with respect to some "actual capacity" estimate of total labor time available for all four services.

Ask the students what happens if, for example, the associate director quits and nobody else is hired to replace him/her'? It is clear that the percentages would have to be recalculated because both the numerator and denominator are changing. If the change is temporary, the use of standard percentages seems appropriate.

The allocation basis used for the four cost centers related to other expenses (such as office and expenditures) is not clear. Students can propose alternative allocation bases for each, on which the percentages might have been based. Some students, of course, will propose that Shelter Partnership do a study to better understand the purposes served by each of these various categories of expenses.

G. Is accuracy (or truth) the desired goal for Shelter Partnership's cost system?

For internal decision making purposes, approximation of the real costs is probably desirable. However, in communications to outside parties, Ms. Schwartz suggests that Shelter Partnership might want to overstate the costs of the Resource Bank, or at least recognize the full costs of the Bank. She thinks that higher costs will make the Bank appear more substantial and will be more likely to attract the attention of foundations.

If accuracy is not the goal of the cost system, why should management even be concerned with truth? Why not just assign almost every cost possible to the Resource Bank? This, of course, raises a number of legal and ethical issues.

But if Ms. Schwartz's argument that higher costs will attract foundation attention is correct, then she should have the cost system reflect the full costs of the Resource Bank. She should fully value the donation of space from the General Services Administration and she should assign the bulk of the insurance costs to the warehouse. Students will see that assignments like these make cost accounting more an art than a science.

Some students may raise the counter argument that Ms. Schwartz also has incentives to understate the costs of the Bank, to make it look more efficient. Where are the controls on the organization's internal accounting (cost) systems?

H. What do you think of Shelter Partnership's budgeting system?

At some point in the class, some attention can be usefully directed toward Shelter Partnership's budgeting system. Budgeting plays (or should play) key roles for Shelter Partnership. It might be used for resource planning and allocation purposes, and it might serve cost control roles.

The case does not provide much information about Shelter Partnership's budgeting system, but Exhibit I shows that the organization has a budget and that it appears to be only an aggregated, line-item budget. The organization would probably benefit from using program budgeting, instead of their line-item-based system. And where should standards come from for efficiency (actuals vs. standard) comparisons?

I. Should the Resource Bank be tracked and evaluated as a cost center or a revenue center?

It could be done either way. If the Bank is considered a profit center, a value will have to be imputed to the donations.

All other services

Subjective estimates of proportion of resources consumed

Indirect costs

trace

Service

Resource Bank

Cost

Direct bank costs:

warehouse and donations people

warehouse costs

These games are apparently relatively common. See, for example, R. Khalaf, "The Accounting Games Charities Play," Forbes (October 26, 1992), pp. 252-254.

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