Shelter Partnership Inc I Problem What improvements in cost allocation must Ruth Schwartz employ to ensure proper costing

g system in Shelter Partnership? II Objectives To be able to: 1. Identify problems in the current costing system of the partnership 2. Provide analysis and suggest actions to improve the cost allocation system of the entity. III Areas of consideration 1. The company is a non-profit company Accounting for non-profit organizations (NPOs) is peculiar in some ways as compared to commercial organizations. This peculiarity arises from the fact that some grants are being restricted by the donors themselves as to their use and must therefore have an account of costs related only to the said project/restriction. 2. The basis for allocating costs are not clear Costs were being allocated by Ruth to each unit based on her thinking or estimates. Thus, these allocations were made without proper bases supporting the percentage of distribution of costs. Salaries were allocated to the Shelter Resource Bank (SRB) based on a pure estimate, resulting to a possible overor undercosting of the said unit. 3. Possible Undercosting of the Shelter Resource bank (SRB) Given that basis for the allocation of costs among the different objects of costs were a bit baseless, then there could be possibilities that the costs assigned to the SRB is lower than what was supposed to be. In addition, the cost of the warehouse (its rental) was not taken into consideration, as well as the insurance paid for the said edifice. 4. Accounting for the salaries of personnel The distribution of salary costs to the SRB does not have any ground basis for which they were based. The percentage of allocation used was solely based on the estimation made by Ruth the accuracy of which is unverifiable.

IV Alternative Courses of Action 1. Identify and establish the SRB, Technical Division, Program Development and Public Policy as the Shelter Partnerships cost objects and using direct labor hours as the allocation base. Advantages: There will be proper objects for which the costs incurred by the company, most especially the personnel expenses, be allocated. Since personnel expenses constitute huge portion of the total expenses of the organization, direct labor hours will be a proper allocation base for the distribution of costs. Other common costs may be allocated properly.

Disadvantages It may take additional effort for the personnel to identify the number of hours worked by an employee in one department/division.

2. Use multiple-stage cost allocation system rather than singlestage cost allocation Advantages: Costs may be pooled together into similar allocation bases and each pool of costs will be allocated using the most appropriate bases, not simply using a single base for all costs. Other common costs may be allocated properly.

Disadvantages It may be difficult for the organization to determine other allocation basis due to its nature. 3. Allocate costs on the basis of its programs and donations. Advantages: It will be easier for the Shelter Partnership to determine the costs to be assigned to each project and to the SRB. The Shelter Partnership may track the costs associated with a particular donation.

Disadvantages Accuracy of allocation of common costs is neglected.

There is no assurance that undercosting in the SRB will not exist due to unreliable estimation of common costs allocated to the unit. V Conclusion and Recommendation We therefore recommend Shelter Partnership, Inc. the implementation of the Alternative 1, which is to clearly identify and establish the SRB, Technical Division, Program Development and Public Policy as the Shelter Partnerships cost objects and using direct labor hours as the allocation base. It is important that a reliable approach to cost allocation should be adopted, with a consideration on the materiality of the amounts involved and the cost benefit advantages of the approach in that greater accuracy may on occasions only be achievable at a high incremental cost. Expenditures should be allocated directly to activity cost category. Items of expenditure that contribute directly to the output of more than one activity cost category, for example, the cost of a staff member whose time is divided between a fundraising activities and working on a charitable project, should be apportioned on a reasonable, justifiable and consistent basis. Support costs may not be attributable to single activity but rather provide the organizational infrastructure that enables output-producing activities to take place. Such costs should therefore also be apportioned on a reasonable, justifiable and consistent basis to the activity cost categories being supported. In addition, the SRB shall appropriately include in its total cost the economic usage of the warehouse by the Shelter Partnership. Even when such space was donated by the General Services Administration to the organization for its use, an economic cost is consumed due to its usage and thus should be accounted. On the appropriate market rate to be used, it is not clear when the advice (that it would cost $110,000 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 per square foot per month, she could employ $ 486,000 (1.35 x 30,000 sq m x 12 months) as the relevant market rate. Also, the full or at least majority of the cost of insurance paid for by the Shelter Partnership shall also be accounted for as an expense of the SRB VI Potential Problem Analysis What happens when the Shelter Partnership would not heed to the recommended actions above? Simple. There will be no progress as to the current costing situation of the institution. In addition, the SRB would continue to suffer from having an understated cost considering that improper costing is being employed presently. Using the other alternatives above may still improve the costing of the company should the same be implemented. However, the practicality

of their application may be suffered due to the complexity of the said cost allocation systems.