Program Budgeting and Job Costing Nonprofit institutions such as health centers and colleges continually face decisions concerning how to allocate their limited resources. A technique called program budgeting has been developed to help in the making of these decisions. The “‘program” is an activity or set of activities with a particular goal such as placing children for adoption, helping ex-convicts on parole, aiding disabled veterans, or educating students of management.

Program budgeting is a philosophy or state of mind rather than a rigid set of procedures. Questions such as the following are raised: (1) What are the organization’s objectives or goals? Program categories sometimes cut across organizational lines so that two or more departments work together toward a common goal. (2) How much does each program cost? Costs typically include specifically traceable costs such as direct labor plus applied overhead. (3) How is each program funded? Are cash receipts from donations, tuition, or government grants earmarked specifically for one purpose? Sometimes raising money for a specific program can dislodge general funds for other purposes.

As 19_5 began, Muriel Clayton, director of the Uppervale Health Center, faced a decision. She had talked recently with Theodore Rosenberg, an administrator in the State Health Department. He told her that the state might be able to increase its support to the Center by $30,000. Ms. Clayton had to determine which of two activities, drug-addict rehabilitation or alcoholic rehabilitation, was more effective so she could write a formal request for the additional funds.

For purposes of cost analysis, ‘the Center’s activities were divided into four programs: (1) alcoholic rehabilitation, (2) drug-addict rehabilitation, (3)

children’s clinical services, and (4) after-care (counseling and support of patients after release from a mental hospital).

Ms. Clayton felt that costs per program would help her decide where to invest additional funds. Of course, such costs would give her some idea of the inputs devoted to each program. The measure of outputs is far more troublesome. Should it be patients treated, patients cured, patients not requiring further treatment for two years, or what measure? Ms. Clayton decided that cost per patient per year would be a helpful statistic for making her decision.

She felt that it would be too expensive and too difficult to develop a more elegant measure of effectiveness. The Center’s board and staff agreed that if the cost per drug patient per year was not more than 20 percent higher than for the alcoholic patient, the drug program would receive the additional funds.

The Center’s simplified budget was typical for a nonprofit institution in the sense that it was a line-item budget, a mere listing of various costs class1-

fied by so-called “natural” descriptions:

Professional salaries:

6 physicians @ $37,500 $225,000 19 psychologists @ $25,000 475,000 24 nurses @ $12,500 300,000 $1,000,000 Medical supplies 150,000 General overhead (administrative salaries, rent, utilities, etc.) 500,000

$1,650,000 The budget and the accounting system did not show how the costs related to the four programs. Ms. Clayton decided to ask the professional staff to fill out a form indicating what percentage of time each devoted to the four programs. This was a critical form, and Clayton, who had earned uniformly high respect from the professional staff, stressed that it be filled out conscientiously.

Costs of medical supplies were to be allocated on the basis of physician hours spent in each program. General overhead would be allocated on the basis of direct-labor cost (where direct labor is defined to include the time of doctors, psychologists, and nurses multiplied by the salary rate of each.)

Clayton compiled the following data concerning allocations from individual time allocation forms:

DRUG Alsohol Counseling Clinical Children After-Care Total Physicians 2 4 6 Psychologists 6 4 9 19 Nurses 4 4 2 4 10 24 At any point in time, an average of 30 patients are in residence in the alcohol program, each staying about a half-year. Thus, the clinic processed 60 patients, but provided only 30 patient-years of service. Similarly, an average of 40 patients were involved in the drug program for about a half-year each;
they received both counseling and clinical services.
What is the cost of the alcohol and drug programs, using the Clayton approach to cost analysis? What action should be taken?