Chapter 18 - Program Costs

Line-Item Budgets (Step 3)

(Google definition) A budget in which the individual financial statement items are grouped by cost centers or departments. It shows the comparison between the financial data for the past accounting or budgeting periods and estimated figures for the current or a future period.

3 steps to determining program costs

1) Develop a comprehensive policy to guide pricing 2) Classify all sub-units as performing either line or service functions 3) Prepare line-item object classification budgets for all units, both line and service

2 types of costs

1) Direct cost: can be traced to a specific cost objective They are therefore assigned to a specific cost objective as direct costs. example: a direct cost of providing a swimming pool is the cost of chlorine. Chlorine is only needed to operate a swimming pool. 2) Indirect costs: are those that the agency incurs regardless of whether or not it operates a specific program. They are created by two or more cost objectives and are therefore not traceable to a single cost objective. example: cost of an office typewriter is an indirect cost to all program services and facilities. The agency will have a typewriter regardless of whether or not it operates any one specific program.

Methods of Cost Allocation

EQUAL SHARE OF INDIRECT EXPENSES - EACH FUNCTIONAL LINE UNIT RECEIVES AN EQUAL SHARE OF INDIRECT EXPENSES. SALARY OF UPPER MANAGEMENT DISTRIBUTED EQUALLY ACROSS DEPARTMENTS OR DIVISIONS PERCENTAGE OF BUDGET - ACTUAL USE OF THE COST TO BE ALLOCATED IS ACCURATELY CHARATERIZED BY THE PERCENTAGE TIME BUDGET STUDY - THE TIME A SERVICE UNIT SPENDS ON EACH COST OBJECTIVE IS STUDIED COST TRACKING SYSTEM - THE ACTUAL USE OF AN ITEM BY A COST OBJECTIVE IS TRACKED, AND THE ACTUAL COST OF THE ITEM IS CHARGED BACK TO THE UNIT USING IT SPACE AND MEASUREMENT STUDIES - USED WHEN ALLOCATING BUILDING OPERATING EXPENSES - ELECTRICITY, HEADING, MAINTENANCE

Cost

Measurement, in monetary terms, of the amount of resources used for some purpose. Includes all dollars the agency uses in producing a program, regardless of the source of those dollars.

Service Units (Step 2 of implementing a program management accounting system)

Provide services to other units and to the organization as a whole. They are not involved in producing the primary product or service of the organization. For example: the finance office of a recreation and parks department would not be involved in directly producing recreation services and would therefore be classified as a service unit. The same goes for office clerical staff.

The Goals of Accounting Systems

USE THE REQUIRED RESOURCES TO ACCOMPLISH THE MISSION OF THE ORGANIZATION IN AN EFFECTIVE AND EFFICIENT MANNER ACCOUNT FOR ALL THE ORGANIZATIONS EXPENDITURES THROUGH ITS LINE UNITS THE ACCOUNTING PROCESS MUST BE DIRECTLY ENGAGED IN ACCOMPLISHING THE MISSION OF THE ORGANIZATION

Line Units (Step 2 of implementing a program management accounting system)

Units that are directly involved in the production and delivery of the organization's services and products. For example: recreation centre staff members are directly involved in producing and supervising recreation services. Their work group and its costs of operation would therefore be classified as a line unit.

Cost Objective

any activity for which a separate measurement of cost is desired. The functions performed by line and service units are cost objective.

Price

dollar amount the agency charges participants to participate in a specific program.

Cost Allocation

process of identifying and assigning costs to various cost objectives.