Shelter Partnership Inc

INTRODUCTION About Shelter Partnership, Inc The case is about cost allocation accounting concerns in a non-profit corporation “Shelter Partnership, Inc”. The following summaries the key activities undertaken by Shelter and the way these different activities contribute towards the achievement of Shelter’s objective. Approach Before we dive into the case analysis, we would like to first discuss the relevant topic, which we see as the issue of cost accounting in a non-profit organization (“NPO”), to lay the foundation for the analysis of the case subsequently. (A) DISCUSSION OF THE RELEVANT TOPIC – A LITERATURE REVIEW It would be appropriate to develop some background knowledge about the limitation of financial statements of NPOs, support cost, allocation of cost and its importance. (I) Limitation of Financial statements of the nonprofit organizations: Subjectivity in Interpretation of the Financial Statements of the nonprofit organizations. It is important to remember that financial information for nonprofits is interpreted differently from for-profit financial statements. The following is quoted from What a Difference Nonprofits Make: A Guide to Accounting Procedures, 1990, Accountants for the Public Interest: “ Meaningful evaluations and comparisons of nonprofit performance almost always prove difficult and complex. While the profitability of two businesses can easily be calculated, it is much harder to compare the effectiveness of two counseling centers to see which is doing a better job of helping the mentally ill. Without the standard of profitability, it is also difficult to compare the job performance of nonprofit staff and managers.

Since the beneficiaries of nonprofits often cannot afford to pay for services, organizations frequently lose money on every sale. As a result, an increase in the number of clients or customers may paradoxically increase the likelihood of a financial crisis. On the other hand, turning a profit may mean that a nonprofit

References: _“Alliance” The Alliance for Nonprofit Management is the professional association of individuals and organizations devoted to improving the management and governance capacity of nonprofits - to assist nonprofits in fulfilling their mission. _ “RAP 6” Singapore standards “Online compendium of Federal and state regulations for US nonprofit organizations “Critical Issues in Financial Accounting Regulation for Nonprofit Organizations (B) CASE ANALYSIS Question 1: What purposes are served by Shelter Partnership’s cost information? Internal purposes Analyses of operating efficiency As mentioned in part (A)(I), the cost accounting practices of NPOs are similar to those of profit –oriented organizations. Parts of the NPO’s operations could be very similar to profit-seeking organization. In this case, part of Shelter Resource Bank (“SRB”) is similar to a logistics company. Essentially, both are in the business of collection and distribution of goods. The conference organizing work undertaken by Program Development is akin to the conference management activities of an event management company. As such, the ways which the profit-seeking logistics company and event management company use cost information and cost structure to evaluate the efficiency of their operations could be similarly employed by NPO. For example, the logistics company measure “cost per km traveled” to assess their cost efficiency with relation to route planning and trucks utilization. SRB could use the same to assess their transportation cost as well. To measure expense ratio of fund-raising activities (as undertaken by Technical) The expense ratio of fund-raising activities measure the percentage of donations solicited used to run the operations of Technical. If the expense ratio is low, it implies that a high proportion of donations are being used to directly contribute to the beneficiaries, instead of being used to run the fund-raising activities itself. To set targets for fund raising NPOs need to raise adequate funds to finance their operations. An understanding of the nature of NPO’s cost, its structure and drivers would help the NPO determine their fund requirements. Such requirements could be translated into targets when organizing their fund raising activities and help guide response by donors. External purposes Regulatory related Non-profit organizations are typically subject to the governance and regulations by Government of the country in which these NPOs operate in. The regulator(s) of NPOs may call for audit or review of the cost or financials of NPO to ensure that donors’ contributions are not misused. As such, NPOs would need to capture appropriate cost information to comply with regulatory requirements. Report to donor on usage of funds Donations that are solicited could have conditions or restrictions attached by the donors with respect to their usage. Accordingly, periodic reports on costs and fund usage are typically required by donors to track and monitor the usage of their donations. Implications for fund-raising efforts Ruth was concerned that an understatement of cost to operate Shelter Resource Bank (“SRB”) might have a negative impact on her fundraising efforts. This is because most charitable foundations like to donate to larger, more substantial projects. Therefore, such cost information is used by donors as a yardstick to evaluate their decision to provide funding assistance. Question 2: What are the cost objects? Cost object is the technical name for the product, project, organizational unit, or other activity or purpose for which costs are measured. In this case, Shelter currently has just two cost objects. One is SRB, while is other is a category called All Other Activities (“AOA”). Based on the organizational structure of Shelter Partnership, there are four organizational units namely Technical, Program Development, Public Policy and SRB (vehicle for direct material assistance). In order to better understand the resources devoted and operating efficiency of each organizational unit, Ruth could consider further analyzing AOA into its 3 components. In this way, Ruth would be able to better assess the units’ performance by looking at the achievement of the individual unit’s objectives relative to the cost and resources incurred to deliver the respective achievements. Decisions could then be made to expand/maintain good-performing units and/or curtail under-performing activities in order to better achieve Shelter’s objectives as a whole. Having said that, as mentioned in part (A)(I), the amount of cost to be allocated to its 3 components should be material enough for decision-making purposes in order justify the additional work required to enable such detailed allocation. Question 3: Are Ruth’s estimates accurate enough? Salaries are the major component of Shelter’s total cost (>64%) and thus would be a key focus area to assess its cost allocation accuracy. Salaries The estimates made are Ruth relating to salaries cost are; Allocation of indirect expenses of SRB by estimating the proportion of resource that SRB is using; 100%: Warehouse Manager, Donations Distribution Manager, Donations solicitation Manager 50%: Associate Director, Development Director, Office Manager, Receptionist 0%: Executive Director, Program Manager It is reasonably accurate to allocate 100% of the warehouse manager’s salary to SRB, as he worked fully at the warehouse. The method of allocation of Benefits & PTE based on % of salaries is fairly accurate, provided that cost of salaries is fairly allocated. Given the lack of information on the job description of the various positions, we cannot assess with certainty the accuracy of salaries cost allocation. What are they doing within Shelter Partnership, are they working partially or fully with RB? If yes, for which proportion of time? If not, what is the rational to allocate indirect cost at percentage of 50%? In particular; Salaries of development director To determine the resources used more accurately, the share of salaries cost should be stated before deduction of the grant. The grant could be presented separately to show the net effect of the grant. It is not clear how the development director participates in SRB. If the development director is to manage the “Program Development” unit, it may not justify allocating his/her cost to SRB Salaries of Donations Solicitation Manager Should the Donations Solicitation Manager participate in the “Technical” unit to draw donations from foundations, private fundraiser etc, part of his/her salaries should also be allocated to “Technical” instead of 100% to SRB. (account flow should be in line with work flow) Salaries of Executive Director and Program manager By allocating 0% of ED and PM salaries to SRB, it implies that they are not involved in the work of SRB. From the case it seems that Ruth, as Executive Director, also spent a portion of her time to manage SRB. This 0% allocation appears unusual and may cause Ruth’s estimates to be off the mark, especially that ED’s salaries may be a significant component of total salaries cost. A model of how such salaries cost allocation could be referred to part A , Example of Support Cost Breakdown by Activity, (page 4 ) *Other Expense*s Direct expenses of SRB (the likes of warehouse costs, trucking and warehouse temporary labor cost) should be 100% assigned to SRB. With respect to indirect expenses, the information provided are not sufficient to assess the accuracy of cost allocation conclusively (why 50%, and not 20% or 30%, for overhead item such as office rent, office expenditure and so on). While it is correct that the organization should not spent an excessive amount of costs to obtain the absolute figure for allocation, we could achieve a quick and simple way by tagging allocation to a related cost driver (for example: instead of tracking telephone cost at a call level, allocation of telephone cost be based on the way we allocate salaries since telephone cost are driven, in a way, by staff performing their work) Question 4: Address the issues described in “The Concern” section Cost of warehouse space Ruth is aware that she was not accounting for the cost of the warehouse used by SRB. This effectively understates SRB and Shelter’s cost and would negatively affect her fundraising effort. Although there is no physical cash expenditure as the warehouse space is given for free (donated by General Services Administration), an economic cost is consumed and thus should be accounted. (SRB could debit warehouse rental and credit donation income at the market rate) On the appropriate market rate to be used, it is not clear when the advice (that it would cost $110k per year if Ruth has to pay for it) by GSA was given and on what basis the advice was provided. As such, given that in the market today she could not find anything comparable for less than $1.35 psfpm, she could employ $ 486k (1.35 x 30k x 12 months) as the relevant market rate. Cost of Insurance for SRB Given that Shelter’s total insurance premium was driven by SRB, 100% or majority of the organisation’s insurance should be allocated to SRB. However, SRB was allocated 50% of insurance. This is not an accurate picture and the allocation should be adjusted to reflect its usage. Impact of cost on fund-raising effort While it could be true that donors look at size of expenditure to assess their donations contribution, it is very important for NPO to demonstrate their contribution to the cause of their organization. A donor will be interested to know how well the NPO is spending its donations and not just how much the NPO is spending. The NPO could be abusing its donations, inflating its expenditure relative to contribution to its cause, and this is by no means reason for donor to continue its support. Shelter, in funds raising efforts, should communicate some of these performance indicators such as number of homeless helped, value of goods flowed through by SRB to its beneficiaries etc to demonstrate its contribution and value creation. Along with ratios of such performance related to cost, donors can see improvements in efficiency, productivity and resource utilization. Together, this would form a better picture to assess value created by NPO. Indeed, this is one major difference between profit-seeking organizations and NPO.