Chapter 17 - Full Costs and Their Uses

CHAPTER 17
FULL COSTS AND THEIR USES
Changes from the Twelfth Edition
All changes to Chapter 16 were minor.
Approach
This chapter introduces the general concept of cost and describes, in a preliminar wa, methods of
recording costs in an accounting sstem. !ome of the problems that man students seem to ha"e are#
1. !tudents thin$ that there is such a thing as %the% cost. The don&t reali'e that the measurement of cost
alwas relates to some specific cost ob(ect, and that what is an item of cost for one cost ob(ect ma
not be at all rele"ant for another cost ob(ect. As one wa of o"ercoming this misconception, we ha"e
emphasi'ed the idea of %cost ob(ect% from the outset.
). !tudents thin$ in terms of product costs. This is because in financial accounting the students& principal
contact with %cost% was in connection with measuring in"entor cost and cost of goods sold. The,
therefore, fail to appreciate that products *literall %goods%+ are onl one of a number of possible cost
ob(ects. The thin$, for e,ample, that direct material and direct labor are alwas rele"ant costs, and
that the word %direct% means that the material and labor are directl associated with the product,
whereas for certain cost ob(ects *e.g., ad"ertising+, direct material and direct labor are inappropriate
terms. Furthermore, an item of cost ma be direct to a certain cost ob(ect, such as the cost of a
department or responsibilit center, e"en though the item is indirect with respect to a product
manufactured in that responsibilit center. -t is true that we do focus on product costs in Chapters 17
and 1., but the definitions and statements are made broad enough so that the can be used without
modification when other cost ob(ects are discussed.
/. !tudents thin$ that the definitions are applied more precisel in practice than actuall is the case.
The tend to regard an item of cost as being direct labor onl if the can "isuali'e the wor$er as
phsicall touching the product, for e,ample. 0e do not attempt to describe the wide di"ersit that
e,ists in actual practice because this di"ersit tends to confuse beginning students. The point is that
students should not be o"erl concerned about drawing a fine line between direct and indirect costs,
or between manufacturing and non-manufacturing costs.
0e ha"e decided not to stress the idea that cost is a %sacrifice,% which is central to man definitions of
cost. The word %sacrifice% implies something bad, something to be a"oided, whereas a compan gladl
incurs a cost when it belie"es it will recei"e re"enue or some other benefit b doing so. 0e thin$ it more
meaningful to students to thin$ of cost as measuring the use of resources. The should "isuali'e the
resources themsel"esthe phsical material, the hours of labor ser"iceand thin$ of costs as being
monetar measures of how much of these resources were used for a gi"en cost ob(ect.
-n general, we thin$ it desirable to use the word %product% as referring either to a good or to a ser"ice1 that
is, products are the sum of goods and ser"ices. 0e cannot do this uniforml, howe"er, because the term
%product cost% is in widespread use, whereas in the abo"e terminolog it reall should be %goods cost.%
*This is a small point, but it can create confusion if not properl handled. The author of this paragraph did
not comprehend the distinctions made abo"e until man ears after he had completed his first course in
cost accounting.+
17-1
Chapter 17 - Full Costs and Their Uses
The description of the cost flow through a pen factor is a central part of the pedagog. !tudents should
be able to e,plain each line on the flowchart and each of the related (ournal entries.
0e ha"e tried to a"oid the twin dangers of, on the one hand, being critical of cost accounting because it
does not ield costs that are entirel %true% or %accurate% and, on the other hand, creating the impression
that cost accounting does in fact pro"ide true and accurate costs. !tudents tend to go too far toward one or
the other of these e,tremes, and it is difficult for them *as well as for man managers+ to ta$e the
appropriate middle ground. This middle ground, we belie"e, is that although it is impossible to measure
the costs of a cost ob(ect with absolute accurac whene"er indirect costs e,ist, it is ne"ertheless possible
to measure costs with sufficient accurac so that the are useful to management for man purposes.
2anagements would not continue to spend large amounts of mone in the operation of cost accounting
sstems if the did not belie"e that the results were worthwhile.
-n recent ears, full-cost pricing is being gi"en an increasing amount of attention, for a number of reasons
the growth of cost-reimbursement pricing in hospitals and in go"ernment relationships of "arious tpes,
the fact that some foreign producers ha"e been found to ha"e sold goods in the U.!. at less than full cost,
and the growth in the understanding that business has a social responsibilit to set %fair% prices, that is,
prices that do not produce e,traordinaril high profits.
!tudents who ha"e been e,posed to economics should also reali'e that contribution pricing is not
slighted. As the te,t states, this topic is discussed in depth in Chapter )6, where it belongs, and in this
discussion a distinction is drawn between situations in which full-cost pricing is appropriate and
situations in which contribution pricing is appropriate. 3f course, if students ha"e not been e,posed to a
course in economics of the tpe implied abo"e, then this problem will not e"en arise.
-t is desirable that the relationship between profit and assets emploed be emphasi'ed. This relationship
was introduced in Chapter 1/, and it will come up se"eral times in later chapters in this boo$. -t is not an
eas relationship to grasp *especiall the relationship between profit percentage, asset turno"er, and return
on in"estment+, but once the student understands it, he or she has a model that e,plains how the parts of a
business, and decisions on these parts, relate to one another. !ince the general public *including
newspaper stories and tele"ision news programs+ tends to thin$ of profits as a percentage of sales, it is not
eas to get students to thin$ in terms of the broader and more "alid concept of return on in"estment.
An discussion of pricing necessaril includes a discussion of profit. !ome students are emotionall
antagoni'ed b the basic concept of profit1 the confuse %profit% and %profiteering,% or the ha"e the
impression that business e,tracts an unconscionable amount of profit from the consumer. -f the are to
understand what normal pricing practices actuall are, the must o"ercome this emotional bloc$. -t is
hoped that the reiteration of the point that a business must earn a reasonable return on its in"estment if it
is to sur"i"e ma help in o"ercoming this bloc$.
Cases
Delaney Motors raises the general issue of 4what is cost56 and enables a discussion of the possible uses of
full cost information.
Lipman Bottle Company deals with the use of cost data in product pricing decisions.
Shelter Partnership, Inc., allows students to see the multiple purposes for which cost accounting is used
in a nonprofit organi'ation and to consider whether additional cost accurac is desirable.
17-)
Chapter 17 - Full Costs and Their Uses
Problems
Problem 17-1: Martin Company
*777s omitted+
8aw 2aterials -n"entor
9alance, !ept. 1.................................................................................................................................................................................... .7 -ssued for use....................................................................................................................................................................................... 177
:urchases.............................................................................................................................................................................................. ;; To balance............................................................................................................................................................................................ /;
1/; 1/;
9alance, 3ctober 1............................................................................................................................................................................... /;
0or$ in :rocess -n"entor
9alance, !ept. 1.................................................................................................................................................................................... <; =oods manufactured............................................................................................................................................................................ )17
>irect material...................................................................................................................................................................................... 177 To balance............................................................................................................................................................................................ 1)7
>irect labor.......................................................................................................................................................................................... 67 //7
3"erhead.............................................................................................................................................................................................. 7;
//7
9alance, 3ctober 1............................................................................................................................................................................... 1)7
Finished =oods -n"entor
9alance, !ept. 1.................................................................................................................................................................................... 6; Cost of sales......................................................................................................................................................................................... )/;
=oods manufactured............................................................................................................................................................................ )17 To balance............................................................................................................................................................................................ ?7
)7; )7;
9alance, 3ctober 1............................................................................................................................................................................... ?7
Cost of !ales
)/;
Problem 17-2: !rtis Company
Calculation of normal selling price for )7,/ assuming continued use of full cost#
)7,) -ncrease )7,/
>irect material...................................................................................................................................................................................... @ ?.77 @ .?.A @ ?.?.
>irect labor.......................................................................................................................................................................................... 7.77 ..?A 7..?
-ndirect manufacturing......................................................................................................................................................................... ?..7 .67 ;.?7
!elling and administrati"e.................................................................................................................................................................... /.;7 .77 /.;7
Total full cost................................................................................................................................................................................. 1<./7 1.<) )1.))
:rofit *17B+......................................................................................................................................................................................... 1.</ .1< ).1)
!elling price......................................................................................................................................................................................... @)1.)/ @).11 @)/./?
A1) percent increase for direct material *.1) , @?.77 C @.?.+ and for direct labor *.1) , @7.77 C @..?+
@6,777 increase with "olume of 17,777 units C increase of @.67 per unit.
Problem 17-": Micha #mith
17-/
Chapter 17 - Full Costs and Their Uses
a.
Fee per hour C
hours 1;7
@/,/77 profit >esired @;,777 costs Total +
C @67.77 per hour
b. 8e"enue, 177 hours D @67.................................................................................................................................................................. @6,777
Costs.................................................................................................................................................................................................... ;,777
:rofit.................................................................................................................................................................................................... @ /77
Problem 17-$: %alade Company
a. Calculation of selling prices#
Total
Compan
:roduct
EEEFEEE
:roduct
EEEGEEE
>irect manufacturing cost.................................................................................................................................................................... @ 777,777 @?77,777 @/77,777
-ndirect manufacturing cost.................................................................................................................................................................. ).7,777 167,777 1)7,777
!elling and administrati"e cost............................................................................................................................................................. 1?7,777 .7,777 67,777
Full cost................................................................................................................................................................................................ 1,1)7,777 6?7,777 ?.7,777
>esired profitA..................................................................................................................................................................................... ).7,777 167,777 1)7,777
!ales re"enue........................................................................................................................................................................................ @1,?77,777 @.77,777 @677,777
>i"ide b units..................................................................................................................................................................................... H 17,777 H 17,777
!elling price per unit............................................................................................................................................................................ @.7.77 @67.77
AThe desired profit of ).7,777 for the compan as a whole is ); percent of the companIs full cost. Therefore, a ); percent profit
margin percentage is applied to the full cost of each product to obtain the selling price.
The profit percentage is eJual to#
*>esired profit K !elling and administrati"e cost+ H Full production cost. For :roduct A it eJuals
*@167,777 K .7,777+L;67,777 C ?)..6B which is the same as for product G C *@1)7,777 K @67,777+L
@?)7,777 C ?)..6B

b.
Total
Compan
:roduct
EEEAEEE
:roduct
EEE9EEE
!ales re"enueA...................................................................................................................................................................................... @1,)?.,777 @/.?,777 @.6?,777
Full costK............................................................................................................................................................................................. 1,7?7,777 /)7,777 7)7,777
:rofit.................................................................................................................................................................................................... @ )7.,777 @ 6?,777 @1??,777
A!ales 8e"enue
A# ;,777 units D @76..7 C @/.?,777
9# 1;,777 units D @;7.67 C @.6?,777
KFull Cost
A# *;,777+

units 17,777
@6?7,777
C @/)7,777
9# *1;,777 units+

units 17,777
@?.7,777
C @7)7,777
17-?
Chapter 17 - Full Costs and Their Uses
c. :rofit margin pricing results in product prices containing identical profit percentages. Mowe"er,
the product with the higher price will ield the higher total dollar profit. Therefore, a shift in
product mi, toward lower price items will reduce total dollar profits for the compan as a whole.
Cases
Case 17-1: Delaney Motors
*

&ote: This case is unchanged from the Twelfth Edition.
Approach
This introductor case is a "ehicle for discussing the allocation of costs without the complications and
calculations that are found in later cases. -t can be used to ma$e the following points#
There is no perfect wa of allocating indirect costs to cost ob(ects. Ne"ertheless, some methods are
better than others.
The underling concept is to allocate on the basis of causation.
Full costs *i.e., direct costs plus an eJuitable share of indirect costs+ ma be useful#
a. For e,amining the profitabilit of a segment. >oes it %carr its own weight%reco"er its share of
costs plus a profit5
b. For comparing the profitabilit of a segment with that of similar segments in other companies.
c. -n arri"ing at selling prices.
d. -n moti"ating managers b pro"iding the basis for bonus calculations.
Mowe"er, full costs are not necessaril worth the effort of collecting them for an of these purposes.
Also, the can be misleading and misused unless their limitations are understood.
Analysis of Allocation Methods
A
This Teaching Note was prepared b 8obert N. Anthon. Copright O b the :resident and Fellows of Mar"ard College.
Mar"ard 9usiness !chool Teaching Note ;-1./-7<1.
17-;
Chapter 17 - Full Costs and Their Uses
Puestion 1 suggests that attention should first be focused on the rationale used b the consultant in
arri"ing at the allocations. *!ome instructors ma prefer to ta$e the re"erse approach# first, discuss the
possible usefulness of the costs, and then discuss the techniJues used.+
The ob(ecti"e here is to allocate all indirect costs to the bod shop. -n man companies, general and
administrati"e e,pense *such as the owner&s salar and legal and auditing+ would not be allocated at all.
Full allocation is helpful in (udging whether the bod shop is profitable after reco"ering its fair share of
all costs. -t also is desirable in impro"ing the basis of comparison with other dealers. Unless all costs are
allocated, comparisons ma be distorted because of differences in practices as to what costs are classified
as general and administrati"e. *There are some indications of this di"ersit in the case.+
!emi"ariable costs are allocated on the basis of number of emploees. This is a surrogate for direct labor
hours, which would ha"e been used if a"ailable. :robabl, the number of emploees is an indication of
the relati"e amount of effort reJuired b management, and hence is satisfactor.
The alternati"es of re"enue dollars or gross margin dollars are less satisfactor. The tend to be based on
the criterion of %abilit to pa,% which defeats the purpose of the allocation. *-f allocated on the basis of
re"enue, the relati"e profitabilit of each segment would be the same as if there were no allocations at
all.+ The criterion should be causation.
The label 4semi"ariable6 is probabl not accurate. These are probabl fi,ed. The are unli$el to "ar at
all with changes in "olume in a gi"en dealership, within reasonable "olume ranges. The are discretionar
costs, but that is not the same as semi"ariable.
The real distinction is between %occupanc costs% *here labeled %fi,ed costs%+ and other indirect costs.
This distinction is useful because occupanc costs *depreciation and other costs related to the building
and eJuipment+ are reasonabl allocated on the basis of sJuare footage, or something similar.
-n this situation, the distinction between the two tpes of costs turns out to be unimportant because both
tpes charge about the same percentage of costs to the bod shop *)1.7<B in one case and )7B in the
other+.
The Qol$swagen method of using a %"alue factor% to weight the amount of occupanc costs charged is an
interesting topic to debate. -f the guiding criterion is causation, it is doubtful that the "alue factor reflects
causation. 2ore li$el, it does the opposite# the bod shop probabl has more eJuipment and, therefore,
should ha"e a higher weight than the used car department.
The danger e,ists that the discussion will get bogged down in the details of "arious allocation methods.
!tudents should lea"e this topic with the general impressions gi"en at the beginning# no method is perfect,
and it is not worthwhile to argue about fine points. Mowe"er, some methods are better than others.
'se of the (nformation
To introduce this part of the discussion, it might be useful to as$ %0h should 2r. >elane worr5 -f the
bod shop were closed down, the compan would lose the gross profit of @<1,177, and ob"iousl he
doesn&t want to do this.%
17-6
Chapter 17 - Full Costs and Their Uses
A counter-argument is that e"er segment of the compan ideall should contribute a share of the profits.
-f a segment operates at a loss, it is at least cause for concern. The main result of the analsis was that it
did lead to Juestions and a ree,amination of possibilities for impro"ing profitabilit, Juestions that might
not e"en be raised in the absence of such an analsis. Theoreticall, managers should continuall be
studing was of impro"ing profitabilit. -n practice, managers ha"e a limited amount of time and need
some guidance in deciding where to focus attention.+
The comparison with other dealers shows that the ma(orit of dealers *as indicated b the median, No. 6+
ha"e a bod shop that earns a profit after all costs ha"e been allocated. This raises the Juestion# -f the
can do it, wh can&t >elane5
3ne line of in"estigation is the possibilit of raising selling prices. This is feasible onl if >elane&s
prices do not get out of line with competition. Thus, the idea of finding out what competitors charge is
important. The fact that >elane has a lower gross profit percentage than other dealers *)<.7B "s. /7.7B
for No. 6 and /7.6B for No. /+ indicates that there ma be a little room for impro"ement here, but not
"er much.
The more li$el cause of the situation is "olume. Note that the allocated costs No. 6 and No. / are not
proportionatel greater than >elane or No. <, but that No. 6 and No. / ha"e much larger "olume. Are
there was of increasing "olume, for e,ample, b ad"ertising5 3r does the low "olume indicate a lac$ of
customer satisfaction, and if so, is there a wa of impro"ing this5
-f time permits, a discussion of the basis for the bod shop manager&s bonus ma be interesting. -f based
on profitabilit as calculated in the e,hibit, the manager ma not understand the rationale for the
allocations and ma therefore not accept the fairness of the bonus calculations. There are indications that
if a bonus is paid at all, it might be based on the controllable profit, which is, it appears, appro,imatel
the same as the gross profit. Mowe"er, it ma be premature to raise the bonus Juestion in this case.
Concl!sion
Assuming that 2r. >elane can&t find was of ma$ing the bod shop profitable, should he discontinue it5
The argument that he would then ha"e more time to de"ote to the profitable segments seems of dubious
merit, especiall in "iew of the si'e of the contribution that would be lost. -n an e"ent, the numbers that
are rele"ant to such a decision are the differential costs and re"enues, not the full costs. *This is a good
opportunit to emphasi'e again the idea of different costs for different purposes.+ The ad"antage of being
able to offer customers a bod shop is also rele"ant.
!tudents can easil pic$ holes in the numbers. The are admittedl crude. Mowe"er, the calculations were
made from the e,isting sstem and did not reJuire new data collection. The stud was therefore Juite
ine,pensi"e, a few hours at most. -f not ta$en as being too precise, the results ma pro"ide some useful
food for thought to 2r. >elane, focusing attention on an area in which profit impro"ement is possible. -f
ta$en too seriousl, howe"er, the can lead to an unwise action1 that is, the numbers ta$en b themsel"es
certainl do not indicate that the bod shop should be closed or leased.
17-7
Chapter 17 - Full Costs and Their Uses
Case 17-2: Lipman Bottle Company
*

&ote: This case is unchanged from the Twelfth Edition Please see the printed Instructor!s "esource
#uide for the $ar%ard Teaching &otes
Case 17-3: Shelter Partnership, Inc
*

&ote: This case is unchanged from the Twelfth Edition
Approach
This case was written to illustrate the use of cost information and cost sstems in a nonprofit setting. The
case is particularl interesting because managers at !helter :artnership were acti"el considering whether
the possible undercosting of one of the organi'ation&s ma(or elements *!helter 8esource 9an$+ might be
ad"ersel affecting their fundraising.
#!ggested Assignment )!estions
!uggested Juestions appear at the end of the case.
Case Analysis
' (hat is the main purpose of cost information at Shelter Partnership)
The class should discuss three purposes#
1. :roduct costing. 2anagers should $now the costs of the different ser"ices the organi'ation
pro"ides. -f the costs of a particular ser"ice are (udged to e,ceed "alue, that particular ser"ice can
be discontinued.
For e,ample, the !al"ation Arm managers anal'ed the costs of their organi'ation&s "arious
programs. The decided to discontinue pic$-up ser"ice of donated goods at pri"ate residences.
The cost of doing so was greater than the "alue of the goods recei"ed. -nstead, the decided to
use donation centers in ma(or traffic areas *which ga"e them economies of scale+.
!tudents should understand, howe"er, that use of cost information for product costing purposes is
limited in !helter :artnership because this is not a client-supported organi'ation. 2ost of the
re"enues come from donations, not sales or ser"ice fees, and costing has little to do with pricing.
). Fund raising. Cost estimates help determine the le"el of fundraising necessar to support !helter
:artnership&s acti"ities. *Note that some students Juestion 8uth !chwart'&s assumption that higher
costs facilitate fund raising.+
/. !ourcing decisions. 2anagers can ma$e decisions as to whether to ha"e the organi'ation pro"ide
its own ser"ices or contract them to outsiders *ma$e or bu+.
Cost control purposes seem not to be greatl ser"ed b the cost sstem. !helter :artnership did
not ha"e reliable cost standards, so actuals "s. standards comparisons were not possible.
Mowe"er, some actuals "s. histor comparisons were useful.
A
This Teaching Note was prepared b 2ichael F. !andretto. Copright O b the :resident and Fellows of Mar"ard College.
Mar"ard 9usiness !chool Teaching Note ;-1.)-)71.
A
This teaching note was prepared b Genneth A. 2erchant. Copright O 1<<. b Genneth A. 2erchant.
17-.
Chapter 17 - Full Costs and Their Uses
B The Shelter Partnership cost system*
C !helter :artnership pro"ides four products or ser"ices#
a. technicalfund raising and distribution
b. program de"elopmentconferences, publicit
c. public polic supportresearch studies, educational programs
d. 8esource 9an$
9ut 2s. !chwart' does not e,press interest in tracing costs to the indi"idual ser"ices, with the
e,ception of the 8esource 9an$.
D Is a single+stage cost system appropriate) (hy or why not)
The students can Juic$l identif the cost pools and recogni'e how the costs are distributed across the
difference ser"ices. There are three main categories of cost pools# *1+ personnel *which includes
salaries, benefits, and paroll ta, e,penses+1 *)+ other operating costs1 and */+ independent contractor
costs.
>irect ban$ costs#
warehouse and donations
people
warehouse costs
Cost
8esource 9an$
!er"ice
trace
-ndirect costs
!ub(ecti"e estimates of
proportion of resources
consumed
All other ser"ices
17-<
Chapter 17 - Full Costs and Their Uses
!ome students will de"elop sstems that add a %first-stage% allocation to the sstem, in which
e,penditures from the budget line items are pooled according to a common cost dri"er. Then the
calculate burden rates for each cost pool and assign costs through a second stage allocation down to
the cost ob(ect *ser"ice or program+ le"el. Their cost dri"ers are commonl labor dollars of the
&&personnel pool,% and floor space for the %other operating costs% pool, etc. The students will argue that
their scheme will ma$e the costs of the "arious cost ob(ects more %accurate.% -t is impossible to reach
consensus on that, but most students will agree with 2s. !chwart' that !helter :artnership has no
particular need for this le"el of sophistication.
-t would be time-consuming and therefore costl, to identif the acti"ities performed and to attach
costs to each of these acti"ities, thereb constructing a true acti"it-based *)-stage+ cost sstem. The
benefits would probabl not e,ceed the costs.
E $ow many cost centers should Shelter Partnership identify)
!helter :artnership uses nine cost centers. There are two personnel cost centers because different
categories of people are allocated in different proportions to the 8esource 9an$. The costs of the
donations distribution and solicitation managers and warehouse staff are allocated 177B to the
8esource 9an$. The costs of the administrati"e personnel *associate director, de"elopment director,
office managers, and receptionists+ are allocated ;7B to the 8esource 9an$ and ;7B to the other
three ser"ices.
!tudents will Juestion wh no personnel costs related to the e,ecuti"e director and program manager
are allocated to the 8esource 9an$. The will also Juestion whether it is desirable to ma$e salar
information essentiall public b incorporating them into the allocations.
!helter :artnership uses four costs centers for the other operating costs#
a. 0arehouse e,penses *177B assigned to the 8esource 9an$+.
b. 3ffice rent, office e,penditures, postage, photocoping, printing, telephone, insurance, local
tra"el, communit trainingLboard education, training and education, and eJuipment *;7B
assigned to the 8esource 9an$+1
c. Nonlocal tra"el, newsletters, and publications *one-third assigned to 8esource 9an$+1
d. *Not mentioned in te,t+ :rofessional fees *assigned on a pro(ect-b-pro(ect basis+.
Three cost centers are used for the independent contractor costs#
a. Truc$ing and warehouse temporar labor costs *traced 177B to the 8esource 9an$+1
b. Accountant e,pense *;7B assigned to 8esource 9an$+#
c. >e"elopment consultant *which were 'ero in 1<<7+ and the temporar consultant *7B to
8esource 9an$+.
Are these enough cost centers5 Too man5 The discussion should refer bac$ to the purposes of the
cost information *Puestion 1+.
, 're "uth Schwart-.s estimates accurate enough)
17-17
Chapter 17 - Full Costs and Their Uses
This is a difficult Juestion to answer, but it gets students thin$ing in the right direction. The students
reali'e that 8uth could inter"iew her staff and get better estimates as to how the direct their time
toward the four ser"ices the organi'ation pro"ides. The also reali'e that, for the personnel and
independent contractor e,penses, the allocation bases *which map directl into the percentages+ are
labor hours, measured with respect to some %actual capacit% estimate of total labor time a"ailable for
all four ser"ices.
As$ the students what happens if, for e,ample, the associate director Juits and nobod else is hired to
replace himLher&5 -t is clear that the percentages would ha"e to be recalculated because both the
numerator and denominator are changing. -f the change is temporar, the use of 4standard
percentages6 seems appropriate.
The allocation basis used for the four cost centers related to 4other e,penses6 *such as office and
e,penditures+ is not clear. !tudents can propose alternati"e allocation bases for each, on which the
percentages might ha"e been based. !ome students, of course, will propose that !helter :artnership
do a stud to better understand the purposes ser"ed b each of these "arious categories of e,penses.
# Is accuracy /or truth0 the desired goal for Shelter Partnership.s cost system)
For internal decision ma$ing purposes, appro,imation of the real costs is probabl desirable.
Mowe"er, in communications to outside parties, 2s. !chwart' suggests that !helter :artnership might
want to o"erstate the costs of the 8esource 9an$, or at least recogni'e the full costs of the 9an$. !he
thin$s that higher costs will ma$e the 9an$ appear more substantial and will be more li$el to attract
the attention of foundations.
-f accurac is not the goal of the cost sstem, wh should management e"en be concerned with truth5
0h not (ust assign almost e"er cost possible to the 8esource 9an$5 This, of course, raises a
number of legal and ethical issues.
9ut if 2s. !chwart'&s argument that higher costs will attract foundation attention is correct, then she
should ha"e the cost sstem reflect the full costs of the 8esource 9an$. !he should full "alue the
donation of space from the =eneral !er"ices Administration and she should assign the bul$ of the
insurance costs to the warehouse. !tudents will see that assignments li$e these ma$e cost accounting
more an art than a science.
!ome students ma raise the counter argument that 2s. !chwart' also has incenti"es to understate the
costs of the 9an$, to ma$e it loo$ more efficient.
1
0here are the controls on the organi'ation&s
internal accounting *cost+ sstems5
$ (hat do you thin1 of Shelter Partnership.s 2udgeting system)
At some point in the class, some attention can be usefull directed toward !helter :artnership&s
budgeting sstem. 9udgeting plas *or should pla+ $e roles for !helter :artnership. -t might be used
for resource planning and allocation purposes, and it might ser"e cost control roles.
The case does not pro"ide much information about !helter :artnership&s budgeting sstem, but
R,hibit - shows that the organi'ation has a budget and that it appears to be onl an aggregated, line-
item budget. The organi'ation would probabl benefit from using program budgeting, instead of their
line-item-based sstem. And where should standards come from for efficienc *actuals "s. standard+
comparisons5
1
These games are apparentl relati"el common. !ee, for e,ample, 8. Ghalaf, %The Accounting =ames Charities :la,% ,or2es
*3ctober )6, 1<<)+, pp. );)-);?.
17-11
Chapter 17 - Full Costs and Their Uses
I Should the "esource Ban1 2e trac1ed and e%aluated as a cost center or a re%enue center)
-t could be done either wa. -f the 9an$ is considered a profit center, a "alue will ha"e to be imputed
to the donations.
17-1)