Group 1

Factual Background

> Shelter Partnership, Inc. is a nonprofit organization

> Collaboratively solving homelessness in Los Angeles
County

> The case is about cost allocation accounting concerns of
the said corporation.


About Non Profit Organizations
A nonprofits statement of financial position reports the
organizations assets and liabilities in some order of
when the assets will turn to cash and when the liabilities
need to be paid.

A nonprofit organizations statement of financial position
is represented in the following accounting equation:

Assets = Liabilities + Net Assets


Statement of the Problem

What cost allocation and cost accounting methodology
must Ruth Schwartz adopt in order to support the work
of Shelter Partnership, and in particular, the fundraising
efforts of the Shelter Resource Bank?
Objectives
1. To identify issues in the cost accounting
system of Shelter Partnership with respect to
the Shelter Resource Bank.
2. To identify alternative cost allocation
methods and practices in view of the
requirements of the Shelter Resource Banks
fundraising efforts and the principles of full
cost accounting.
Point of View
Ruth Schwartz
o As the Executive Director of Shelter Partnership, Inc.
Areas of Consideration
Company will continue as a Non-Profit
Organization
That the Shelter Partnership will maintain
the same operating units/program areas
identified in the case
That the expenses listed in Exhibit 1 are
shared across all operating units


lack of information about the job descriptions
of the various positions
only financial information provided was the
Statement of Revenues and Expenses for
1990
no specific information about Shelter
Partnerships budgeting system
Analysis
Questions

1. What purposes are served by Shelter Partnerships cost
information?
2. What are the cost objects?
3. Are Ruth Schwartzs estimates accurate enough?
4. Address the issues described in The Concern section
of the case.

What purposes are served by Shelter
Partnerships cost information?
A. Financial Reporting
B. Sourcing Decisions
C. Program Costing
D. Internal and External Financial Auditing
E. Performance Auditing
F. Strategic Planning
G. Compliance Audit
H. Fund Raising
What are the cost objects?
> Product

> Organizational Unit

> Other Activity or Purpose which costs are
measured.

Relevant cost objects of the Shelter
Partnership are the various program areas
o Direct Material Assistance
o Program Development
o Technical Assistance
o Public Policy Support


Are Ruth Schwartzs estimates
accurate enough?
Ruth Schwartzs estimates are hardly
accurate enough, especially considering the
centrality of the Shelter Partnerships cost
information to the companys fundraising
initiatives for its direct material assistance
program.
Shelter Partnership, Inc.
Statement of Revenues and Expenses - 1990






Full Cost of the SRB
Direct expenses
o Salaries of warehouse manager, donations
solicitation manager, donations distribution manager -
100%
o Warehouse costs - 100%
o Trucking - 100%
o Warehouse temporary labor - 100%

Indirect expenses
o Salaries of associate director, development director, office manager, receptionist - 50%
o Occupancy (office rent) - 50%
o Office expenditures - 50%
o Postage - 50%
o Photocopying - 50%
o Printing - 50%
o Telephone - 50%
o Insurance - 50%
o Local travel - 50%
o Community training/board education - 50%
o Training and Education - 50%
o Equipment - 50%
o Non-local travel - 33.34%
o Newsletters - 33.34%
o Publications - 33.34%
o Not included - executive director, program manager, development consultant, temporary
receptionist
Address the issues described in The
Concern section of the case.
Cost of the warehouse not accounted for
o Ms. Schwartz must make a more accurate
determination of the cost of the warehouse, as this
affects the Partnerships solicitation efforts
Inaccurate cost estimates for insurance due
to the exclusion of the warehouse in
Schwartzs cost accounting
o The goods in the warehouse are potentially of greater
value than the warehouse itself, and so the cost of
these must be included in the coverage of the
Partnerships insurance policy, especially since the
premium is primarily driven by the Resource Bank.





Alternative Courses of Action #1
Continue using the same cost objects and
costing methods as before, while
improving the accuracy of warehouse and
insurance costs
Advantages:
No significantly greater accounting expense
The company will be able to focus on two of the most
glaring costing-related problems, which are those
concerning the warehouse and Shelter Partnerships
insurance policy costing
Improvements in cost accounting can be made in
phases, and so the company will not be spreading itself
too thin as the changes are introduced

Disadvantages:
Shelter Partnership will be unable to provide donors program-
specific cost information, apart from that associated with the
Resource Bank
Lack of important program-specific cost information that may be
useful for strategic planning
Costing-related problems associated with salaries are
unaddressed
Alternative Courses of Action #2
Use more precise cost objects by further
specifying the program areas included in
All Other Expenses, while improving the
accuracy of warehouse and insurance
costs
Advantages:
Better assess each operating units performance by looking at
the achievements of the specific objectives of each program
area, and the degree to which these were accomplished in a
particular accounting period, relative to the costs incurred
This would allow her to determine how much of the
organizations income is dedicated to each operating unit or
program area


Disadvantages:
Higher expenses for cost accounting
High probability in arriving to same information after the
assessment

Alternative Courses of Action #3
Reassess the cost allocation related to
salaries, while improving the accuracy of
warehouse and insurance costs
Advantages:
Greater accuracy in reporting the most significant expenses of
the Partnership (personnel)
Improved overall accuracy of cost information without going into
the minor details of smaller overhead expenses such as
postage, printing, etc.

Disadvantages:
Marginally higher accounting expense
Disregards potentially important differences in the way
operating units spend their overhead allocations

Alternative Courses of Action #4
Use more precise cost objects and
improve accuracy of salary costing, while
improving accuracy of warehouse and
insurance costing
Advantages:
Significantly more accurate cost information, which is very
useful for the organization and its donors
Captures all major differences across program areas with
respect to direct and overhead costs and the way these are
allocated

Recommendation

ACA #4
o Use more precise cost objects and improve
accuracy of salary costing, while improving
accuracy of warehouse and insurance costing


Conclusion
The more accurately one can assign a cost to a certain
operational unit or program that factually incurred such
costs, the more useful the organizations financial
records and reports.
This is especially important for NPOs like Shelter
Partnership, as the correct allocation of the cost
allocation of resources may help to define the objectives
of the organization and its measurement criteria, and
also help an organization with its strategic planning and
partnerships.
This in turn will help the donor agencies to
evaluate the organizations performance and
potential for delivering the promised benefits
to beneficiaries, as well as compliance with
contract terms and relevant legal/regulatory
standards.