2. Examine the costs listed in Table 2.

a. Identify the direct costs associated with each service or program.

b. Which costs would be organization-sustaining costs? Provide an argument for or against assigning these costs to services or programs.

ArclightCounty Day Care Center, Inc. BACKGROUND The Arclight County Day Care Center, Inc. (ACDC) began operations in a vacant warehouse retrotted with bathrooms and kitchen facilities. ACDC's mission is to provide quality, affordable childcare to the residents of the community and surrounding area. The service area is a rural, economically depressed county that continually ranks in the lowest 10 percent of per-capita income in the state. The organization's seven-member board of directors is comprised of volunteer representatives from various agencies throughout the communitythe school district, community college, hospital, Department of Human Services, etc. The board members bring a breadth of human services experience to the oversight of the day care, but most do not possess an accounting or financial background. While they were committed to the nancial viability of the day care, they initially focused on the center's missionto provide affordable childcare to working-class families. As aresult,the board set childcare rates to achieve their goal of affordability rather than assuring adequate revenues to provide high- quality services while reaching breakeven points. From its founding, the center faced another signicant challenge. The center was the rst of its kind in the community, so negative perceptions about using \"institutionally\" provided daycare were prevalent. local families preferred to use in-home childcare provided by friends or relatives. These perceptions and preferences, coupledwithpoor administrativepractices, caused the center to struggle continually to meet its nancial obligations. ACDC was almost forced to close its doors on more than one occasion. The nancial performance of ACDC is not unusual, as many community-based day care facilities struggle to remain open. DAY CARE INDUSTRY REVENUE AND COST PATTERNS As an industry, day care facilities generally operate with very low prot margins. Typical for-prot day care prot margins are approximately 4 percent, with about 70 percent of a center's total costs attributed to wages and other employeerelated costs (Helburn 1995, 1'72, 176). The state's Department of HumanServices'licensing regulations drive a significant level of e mployeerelated costs. These regulations mandate astrict staff-to-child ratiothat alllicensed facilities must follow. For example, infant care (ages two weeks to two years) regulations require at least onestaff member for every four children [see excerpt from regulations in Exhibit 1]. Thus, if a center pays just the minimum wage (federal wage currently $7. 25perhour, $7.80 w/taxes), atleast $1.95 per hour would need to be chargedfor each infant just to cover the cost of the employee. Additionally, one must consider how revenues are affected when there are fewer than four infants per employee scheduled in the nursery. When the ratio drops, income perhour drops ; however, thefull hourly wage to the employee remains the same and an immediate loss occurs. See Exhibit 1 for the complete Department of Human Service staff ratio requirements. to raise the childcare rates, for fear that doing so would deter Exhibit 1 people from patronizing the facility. On the other hand, the Department of Human Services board was not at all positive that the existing rates would cover Excerptfrom Childcare Regulations the costs associated with the newbuilding. In addition, ACDC was becoming a landlord, and this created additional concerns Staffratio. Thestaff-to-child ratioshall be asfollows: for the board. ACDC agreed to lease floor space or rooms to Age of Children Minimum Ratio of Staff to Children the Head Start program and school district, perform facility Two weeks to two years One to every 4 children maintenance, and provideutilities. ACDCdid not provide any Two years Onetoevery 6children furniture or fixtures. The board's main question: Howmuch Three years Onetoevery 8children rent should ACDC charge the tenants? The ACDC board Fouryears One to every 12 children researched the lease rates charged to the area's commercial Fiveyearstoten years One to every 15 children retail facilities and determined that $20 per 100 square feet Ten years and over One to every 20 children was the going rate and decided to charge their tenants at Source: Department of Human Services. 2008.Child Care Centersand Preschools this rate. Because the board members were not experienced Licensing Standards and Procedures. Comm. 204, August. in making financial and capital expenditure decisions, they did not fully consider that this rate was for floor space only; commercial leaseholders typically pay all of their own utilities, In addition to labor, other costs that impact day care sanitation, and maintenance fees. Thus, the board had center operations include occupancy costs, food, insurance, inadvertently created the potential for a future financial crisis supplies, and programming expenses. Occupancy and for ACDC. Selected post-construction revenues, costs, and food costs are also highly influenced by the Department operational information for ACDCfollow. of Human Services, as a facility must provide a minimum amount of space per child (based on age) and follow specific ACDC COST STRUCTURE nutritional guidelines in preparing meals and snacks. LABOR COSTS ACDC PLANNING AND OPERATIONS ACDC maintains a staff of employees assigned to each age- level classroom that is in compliance with DHS guidelines. About five years into operations, a new board of directors The staff schedule is rotated throughout the week so was appointed and strategic objectives were developed. As that the staff-to-child ratio is always maintained while no its first strategic actions, the board replaced the Center's one employee works more than 40 hours per week. The administration and developed specific operating procedures employer's labor costs include the wages, FICA (7.65%), and to keep the facility afloat financially. In order to eliminate the SUTA rate (1%). The facility does not offer any other the community's negative perceptions of institutionalized employee benefits. (See Table 1) childcare, the board decided to move the center to a higher- quality facility. After further study, the board concluded Table 1 that constructing a new facility would be the best option Payroll Detail for providing quality childcare in an attractive and safe environment. In addition, the new building would house Total Wages Taxes Payroll the community's federally-funded Head Start program and Administrative $ 13,750 $ 1, 190 $ 14,940 the local school district's handicapped pre-school program, Kitchen 9,000 780 9,780 as these programs were housed in inadequate facilities. Infant care 19,250 1,665 20,915 Thus, the ACDC board spearheaded the construction of an Toddler care 38,500 3,330 41,830 8,ooo-square-foot building that would be owned by ACDC, Pre-K care 29,000 2,510 31,510 Inc., and funded in part by a federal grant and a loan from Totals $109,500 $ 9,475 $118,975 the local USDA Rural Development Office. During the planning and construction of the new facility but prior to its opening, the ACDC board had to resolve a number of issues. First and foremost, the board did not wantFOOD COSTS The center provides food for ACDC patrons, but it does Exhibit 2 not charge a separate fee to recover the cost of snacks or Excerpt from Building Lease meals. The cost of food is included as part of the tuition fee. IT IS AGREED this 1st day of July, 20xx, by and between In addition, the employees are required to remain on-site Appaloosa County Day Care Center, Inc., hereinafter referred to during the lunch hour in order to maintain the staff-to-child as Landlord; and Head Start, hereinafter referred to as Tenants: ratio, so their meals are also provided by the center. All That the Landlord hereby leases to the Tenants and the Tenants hereby lease children and classroom staff receive breakfast, lunch, and from the Landlord the following premises situated in Appaloosa County, USA, two snacks a day. to wit: Three roomsandan office (2650sq. ft.) in the "ACDC" daycarecenteras OCCUPANCY COSTS specified in the building plans, in consideration of themutual promises of the Building: Because ACDC worked in conjunction with the parties herein and upon the terms, provisions, and conditions following: local school district and the Head Start program prior to 1. LEASE PERIOD. The term of this lease shall be for a period of twelve constructing the new facility, the building was purposely months starting July 1, 20xx. built larger than the space required by the day care only. 2. RENT. Tenantsshall payrental for the period asfollows; $530.00 on the 1st Consequently, when it came time to analyze costs, it was day of July and$530.00 on the 1st day of eachmonth thereafter during the the board's opinion that the Head Start and school district lease period; saidrental thusatall times to be paid in advance for the month. programs should share in the costs of the loan and building The Landlord will pay all utilities, maintenance, and custodial services on the (i.e., interest expense and depreciation) building. The Landlord reserves all remaining roomsfor their use or lease. Utilities: When ACDC designed the facility, it considered the needs of the tenants and designed their rooms accordingly. OTHER OPERATING COSTS The board did not have the foresight, however, to set up the A complete listing of the organization's operating expenses tenants'rooms with their own gas, electric, and water meters. is shown in Table 2. The costs not previously discussed Therefore, all of the utilities are measured through common include administrative or program costs such as accounting, meters, and ACDC pays the bills for the entire facility. The advertising, continuing education, and supplies. These costs only exception to this is the telephone expense, as each are attributable solely to ACDC. program contracts and pays for its own phone service. See Exhibit 2 for details. THE ACCOUNTANT'S CHALLENGE Maintenance, etc.: As specified in the lease agreement, ACDC pays the entire building's expenses related to Rather than addressing the revenue and cost issues that maintenance, cleaning supplies, and sanitation. See Exhibit arose during the facility construction, the board took a "wait 2 for details. and see" position and opted to review both the childcare rates and rental rates after the new facility had begun INSURANCE COSTS operations. After the first year of building occupancy, the ACDC has four different insurance costs: property, general ACDC board wanted to evaluate the costs and revenues liability, officer's bond, and worker's compensation. The associated with each of the day care'sand tenants'programs. property insurance covers the entire building. The general You are the center's accountant (and the only individual on liability insurance covers the children and staff in the ACDC the board with significant financial knowledge), so the other program and helps protect the center against accidents or board members have asked you to explain why the center is claims against the staff. The tenants must carry their own running at a loss. You indicate that you believe that both the liability insurance. The bond insurance on the officers covers childcarerates and rentalrates were set without establishing the center for any inappropriate handling of financial matters correlation to the costs that they were intended to cover. by the board of directors. Finally, the worker's compensation You also state that you want to take the time to complete insurance covers the administration and ACDC employees a thorough cost and profitability analysis of the day care's for work-related injuries. childcare programs and tenant agreements. Inordertodo so, you decide to implement an activity-based costing system to allocate costs to the various programs and tenants.Tables 1-3 provide revenue and expense information for the first year of operations at the new facility. Tables 4-6 Table 4 Hourly Childcare Rates provide additional information useful for the cost analysis and decision making Infant care $ 2.00 Toddler care 1.75 Table 2 Pre-K care 1.75 Operating Expenses Accounting & legal $ 900 Advertising 150 Table 5 Bank charges 35 Square Footage Continuing education 450 Depreciation 11,80 ACDC 3,600 Food expense 5,500 School district 1,750 Ins. - Blog/property 860 Head Start 2,650 Ins.-Officerbond 120 8,000 2,190 TOTAL Ins. -Gen. liability Ins. - Workers comp 400 Interest expense 13,085 Payroll - wages* 109,500 ACTIVITY-BASED COSTING-A QUICK REVIEW Payroll-taxes* 9, 47 5,950 Activity-based costing (ABC) is used frequently in Repairs & maintenance Sanitation Service 2,435 manufacturing settings because it typically improves product Supplies - Cleaning 365 cost information. ABC replaces arbitrary cost allocations by Supplies - Program/art 3,675 first assigning costs to activities and then to goods based Supplies - Office 2,900 on how much each good uses the activities. The concepts Telephone 1,060 of ABC can also be applied to service-based organizations Utilities 4,000 where tangible products do not exist. In a service Water/sewer 1,100 organization, costs are assigned to the various activities TOTAL EXPENSES $ 175,950 performed, cost drivers that measure the activities performed *See detailin Table 1 are identified, cost driver rates are calculated for each activity, and the resulting rates are used to assign activity costs to the types of services provided. This process reflects Table 3 the causal relationship between the activity, the costs created Revenues by the activity, and the assignment of these costs to services. Tuition IDENTIFICATION OF COST DRIVERS Infant care $ 28,530 There are many activities present in a day care setting that Toddler care 68,710 create or drive costs. An example is the preparing and serving Pre-K care 62,650 of food. It is relatively easy to assign many of the costs, such Rent as food and direct labor, to this activity. It is more difficult, School district 4,200 however, to assign costs to many of the most significant Head Start 6,360 activities that occur regularly in a day care. These activities TOTAL $ 170,450 (like reading a book, playing a game, or teaching a skill) are key components of the service being provided-childcare- but they are difficult to measure. Therefore, identifying each of the individual activities that drive cost and then assigning cost to the daycare programs based on those activities may be cost prohibitive. For that reason, ACDC places activities into broad category classifications. When considering drivers that would be cost effective yet causally related to the costsbeing incurred, population or a population subset becomes the driver identified for many of the activity cost pools. Population may be measured in terms of enrollment, class size, or number of staff. See Table 6. Table 6 Population Total Average Average Total number of Total daily daily average students staff attendance staffing of daily enrolled employed of students employees population ACDC Administrator Kitchen W Infant care 11 10 Toddler care 35 22 26 Pre-K care 32 20 23 School district 1 12 6 18 Head Start 40 46 Total 78 14 102 23 125