Participative Living, Inc.

Participative Living, Inc. (a fictitious name) is an actual charitable organization in a mediumsize community in Canada. It was organized by parents of disabled adults to provide accommodation and training for severely disabled adults in the community. With the help of the Ministry of Community and Social Services, the parents eventually organized six different homes, each with two to four residents. In addition to the six homes, Participative Living also had an employment and education program that provided training and assistance for residents seeking employment or educational opportunities. Overall, the organization had eight divisions composed of six homes, the employment and education program, and an administrative program. A supervisor who reports to the Participative Living executive team staffs each division. The executive team, in turn, reports to a volunteer board of directors composed of 12 people from the community.

Participative Living is a not-for-profit organization. Hence, while surpluses and deficits are occasionally expected, each division is expected to break even each operating period.

Seven of the eight divisions are established as break-even operations, with responsibility for both revenues and expenses. The main revenue source is the Ontario government, through the Ministry of Community and Social Services, which provides all funding necessary to support each home as well as the employment and education program. All costs of Participative Living’s administrative division in excess of any donations from the community are allocated to its other seven divisions. The Ministry follows a procedure of disbursing operating funds for all social service agencies under its direction based on annual operations budgets submitted to the Ministry. Generally, the Ministry is not concerned about whether an individual budget item was overspent as long as the overall spending is within the approved budget.

As a result, it became a common practice among agencies to transfer expenses from one budget line to another and, in the case of Participative Living, to transfer expenses from one division to another depending on which division had excess budgeted funds. As with most government organizations, the Ministry’s administrative process of reviewing and approving a new home for Participative Living is often quite slow. As long as the Ministry is holding up the establishment of a proposed new home, it provides significant interest payments to Participative Living. The Ministry was making large interest payments during the first few months of Participative Living’s 2009 fiscal year (which ended on March 31, 2009) while the organization waited for government approval and funding of the sixth group home.

In November 2008, Mr. Brad Dunford, the executive director of Participative Living, Inc., was reviewing the financial statements for the first seven months of the 2009 fiscal year. He was puzzled about how the agency could suddenly be $50,000 over budget in salaries and benefits when just last month the statements indicated that spending was slightly under budget.

1. As you review operating results for the last seven months at Participative Living, Inc., what problems do you foresee?

2. Consider the style of management and management accounting in this not-for-profit organization, as well as its relationship with the Ministry of Community and Social Services. What aspects of the way business is conducted here do you think have led to the current situation?

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YTD Revenues: Ministry** Interest Donations Total revenues Participative Living, Inc. Operating Results For the Seven Months Ended October 31, 2008 Employ. Employ. Group Group Admin. Admin. and Edu. and Edu. Homes Homes Total Total Budget Budget Costs Budget Actual Budget Costs Costs % of Budget $206,315 $297,675 $521,841 $476,714 $728,156 $774,389 94.0% 20,943 1,567 20,943 0% 1,567 0% $ 22,510 $ $206,315 $297,675 $521,841 $476,714 $750,666 $774,389 96.9% Expenses: Salarios Occupancy costs $ 59,029 $ 61,754 $141,034 $197,386 $434,014 $327,789 $634,077 $586,929 108.0% Services, supplies, and food Personal needs 10,392 4,375 12,264 7,000 39 3,643 2,205 14,147 61,598 68,761 72,029 83,230 86.5% 16,812 35,301 24,830 56,448 44.0% - - 3,077 - 35 26,327 3,112 26,327 11.8% New furnishing and equip. 5 350 60 2,765 6,548 19,236 6,613 22,351 29.6% Other expenses 1,176 4,669 197 7,707 15,681 7,868 Travel and training 436 875 1,972 8,792 1,992 Specific reimbursements (32,119) Allocated admin. costs (75,417) (86,912) 56,293 Total expenses $ Net surplus (deficit) (4) $ $ 22,514 $ $206,315 $ 64,673 $297,675 4,900 (35,707) 22,239 $ 17,054 4,400 14,567 (32,119) (35,707) 19,123 (1) $523,684 $476,714 $729,995 $774,389 $ (1,843) $ $ 20,671 $ 20,244 84.2% 30.2% 90.0% 0.0% 94.3% N/A *Budget columns represent the total annual budget. Note that Participative Living is now seven months into its fiscal year. **Ministry revenues are based on actual payments made by the Ministry. Total payments limited to maximum of total annual budget approved. Source: Adapted from M. Heisz, "Participative Living, Inc.," Journal of Accounting Case Research 2(3), 1995, pp. 87-91. Permission to use has been granted by Captus Press, Inc. and the Accounting Education Resource Centre of The University of Lethbridge. [Journal Subscription: Captus Press Inc., York University Campus, 4700 Keele Street, North York, Ontario, M3J1P3, by calling (416) 736-5537, or by fax at (416) 736-5793, E-mail: info@captus.com, Internet: http://www.captus.com]