Accounting 356v7

Assignment 3

Prepare your answers in a single file.

Question	Marks	Concept Covered
1	30	Not-for-Profit Accounting
2	15	Customer Profitability
3	15	Sales Variances
4	20	Project Costing and Risk
5	10	BSC for Not-for-Profits
6	5	Customer Profitability Analysis
7	5	Risk Management
Total Marks	100

Question 1: Not-for-profit Accounting (30 marks)

Intercity Youth Home

Intercity Youth Home (IYH) is a not-for-profit organization that provides counselling and support services to children under the age of 18. IYH typically houses teenagers who have been in trouble with the police and who have troubled home lives as well as addictions to drugs and alcohol. IYH receives most of its funding through the provincial government and private contributions.

In November 2013, IYH had a major fundraising effort and was able to raise $125,000 in private contributions to purchase a group home. In April 2014, the organization was able to secure a $75,000 mortgage and purchased a house for $200,000. Since then, IYH has continued its fundraising activities and was able to raise $110,000 in donations in 2014 to be used to support the group home. The funds raised annually for the group home are used to employ several in-house social workers on an hourly basis and pay the operating expenses of the home.

In addition to the group home, IYH continues to operate in separate rented premises that provided daily counselling and support services. This counselling office employs 10 social workers who also are involved in overload group home work that cannot be handled by the group home?s in-house social workers. As a result of the increase in work related to the group home, and the resulting increase in the payroll costs of regular IYH social workers, IYH is currently running a deficit in its operating fund. Fundraising for the counselling activities, which is separate from fundraising for the group home, has not been sufficient to cover this deficit. A major fundraising drive to secure donations for IYH counselling services and the group home is planned for 2015.

IYH is fortunate to also have 18 volunteers who provide support services in the group home and the counselling office.

You are an accountant friend of the IYH Executive Director who has asked you to make recommendations that would improve the reporting practices and transparency of the IYH. The Executive Director has said to you:

As you know, our needs for private donations are greater than ever. Due to government cutbacks, government funding is being reduced and private donations have become a very important funding source. However, we are in strong competition with some other very worthy organizations for limited private funding. Recently, some of the people we have approached for private donations have suggested that our reporting practices are lacking, especially in terms of information regarding where we spent past donations, our current financial position, and our effectiveness in achieving the purposes for which we receive money. Since you are an expert in accounting and knowledgeable of accounting reporting for non-profit organizations, we were hoping you might be able to advise us how to improve our annual reporting. Could you recommend improvements to the way we are reporting financial activities so that we are in accordance with accounting standards, as well as provide suggestions to how we can improve the information value for donors?

He then gave you the statement of operations and the balance sheet of IYH (see below).

Intercity Youth Home
Statement of Operations
For the Year Ended December 31, 2014
Operating Fund:
Revenues:
Donations to IYH	$ 180,000
Funding from Provincial Government	$ 250,000
Investment Income	$ 2,500
Total Revenues	$ 432,500
Expenses:
Staff Salaries	$ 85,000
Payroll ? Social Workers	$ 325,000
Office Expenses	$ 45,000
Total Expenses	$ 455,000
Excess of Revenues over Expenses	-$ 22,500
Operating Fund Bal ? Jan 1	-$ 7,000
Deficit ? Dec 31	-$ 29,500

Capital Fund:
Revenues:
Donations to group home	$ 110,000
Expenses:
Payroll ? Social Workers	$ 65,000
Operating Expenses	$ 35,000
Home Purchase	$ 200,000
Mortgage Payments	$ 8,500
Total Expenses	$ 308,500
Excess of Revenues over Expenses	-$ 198,500
Capital Fund Bal ? Jan 1	$ 125,000
Deficit ? Dec 31	-$ 73,500
Intercity Youth Home
Statement of Financial Position
As at December 31, 2014
Assets
Cash	$ 12,000
Donor Pledges	$ 12,000
$ 24,000
Liabilities
Accounts Payable	$ 4,500
Mortgage Payable	$ 75,000
Fund Balance
Operating Fund	-$ 29,500
Capital Fund	-$ 73,500
-$ 23,500

Additional Information:

Included in operating expenses for the Operating Fund was the purchase of a new laptop for $5000. IYH maintains one bank account into which it deposits donations for both IYH and the group home.

Required:

Comment on ways in which IYH?s reporting might be improved to enhance the informational value for donors and the accuracy of reporting according to non-profit accounting standards as set out by the CICA handbook. Provide at least 10 well-developed points. (A strong answer to this question is usually 1.5 to 2 double-spaced pages in length.)

Question 2: Customer Profitability (15 marks)

Alana?s Dresses Inc. is a new company that designs and manufactures custom dresses. Alana?s Dresses currently has six customers that are identified by customer numbers A, B, C, D, E, and F. Besides the costs of making the dresses, the company has the following activities:

Customer orders. The salespeople, designer, and dressmakers spend time with the customer. The cost driver rate is $40 per hour of time spent with a customer.

Customer fittings. The customer will come for a custom fitting of their dress before the final sewing takes place to ensure the proper fit. Cost driver rate is $25 per hour of

fitting time.

Rush orders. Some customers need their dresses quickly. Customers are charged a $25 fee for a rush order. The cost driver rate for a rush order is $100 per rush order.

Number of customer return visits. Customer may return the dresses up to 30 days after picking up the dress to have it refitted or repaired at no extra charge. Normally a refit or

repair will take a seamstress 2 hours to complete. The cost driver rate is $30 per hour of the seamstress?s time.

Information about the six customers follows. Some customers purchased multiple items. The cost of the dress is 70% of the selling price.

Customer A B C D E F Sales Revenue $600 $4200 $300 $2500 $4900 $700

Hours spent on customer order 2 7 1 5 20 3

Hours on fittings 1 2 0 0 4 1

Number of rush orders 0 0 1 1 3 0

Number of return visits 0 1 0 1 5 1

Required:

a. Calculate the customer-level operating income for each customer by preparing a customer profitability analysis (similar to Exhibit 16-7 on page 808 of Reading 8 in your textbook). Rank the customers according to profitability. (10 marks)

b. Are any customers unprofitable? What is causing this? What should Alana?s do with respect to these customers? (5 marks)

Question 3: Sales Variances (15 marks)

The Chair Company manufactures two modular types of chairs: one for the residential (home) market and the other for the office market. Budgeted and actual operating data for the year 2011 are:

Static Budget Actual Results

Home Office Home Office

Number of chairs sold 260,000 140,000 248,400 165,600

Contribution margin $26,000,000 $11,200,000 $22,356,000 $13,248,000

In late 2010, an office-products research firm estimated the industry volume for residential and office chairs of the type sold by the Chair company to be 2,400,000. Actual industry volume for the year 2011 was 2,200,000 chairs.

Required:

a. Compute the sale-mix variance and the sales-quantity variance by type of chair, and in total. (6 marks)

b. Compute the market-share variance and market-size variance. (6 marks)

c. What conclusions can be drawn from these variances? (3 marks)

Question 4: Project Costing and Risk (20 marks)

Sir John Elementary School plans to build a new playground in 2011. They received a

$100,000 government grant to be used for building the playground. They are hoping to break ground in May 2011 and complete the project by the start of school in September. Before they can start the project, however, they must dismantle the existing playground? according to current safety standards, the existing playground is unsafe. A number of residential properties in the community have tested positive for soil contamination, so the school also plans to complete soil testing once the existing playground is dismantled. Due to recent news articles, parents are very concerned about the potential for soil contamination and are demanding a full test to ensure their kids are not playing on a contaminated playground.

Mary Chan, the school principal, has compiled the following estimates for the new playground:

Cost for dismantling existing equipment $15,000

Salvage value from the metal from existing equipment $4,000

Soil testing $15,000

New playground equipment $30,000

Cost of installation $15,000

Cost of resurfacing play area in rubber $45,000

Cost of landscaping (including $5,000 for gravel) $22,000

Cost of removing and replacing soil $53,000

The costs for installation, resurfacing, and landscaping are the costs quoted by professional contractors. Mary was approached by the president of the student council, Gary Schwinger, who has volunteered his own and three other parents? time for installing and landscaping the new playground. This will save the school approximately $18,000 in costs.

The school has two options in terms of dealing with the contaminated soil. The first option is to not conduct the soil testing and to simply resurface the play area with a poured-rubber matting that can cover the entire play surface. This will cost, as Mary indicated in her estimates above, approximately $45,000?a large chunk of the playground budget. The

other option is to perform the soil testing. A municipal worker has estimated that there is a

45% chance that the soil is contaminated. If this is the case, the school will either need to resurface the area for $45,000 or have the contaminated soil removed and replaced for a hefty cost of $53,000 plus the cost of gravel. However, there is a 55% chance that the soil will not be contaminated and the playground equipment can be installed on a gravel bed and the remediation and/or resurfacing cost will be avoided.

Required:

Prepare an analysis of the potential project costs for the following two scenarios. Landscaping will occur in both scenarios. There is no need for gravel, however, in the resurfacing scenario.

a. Resurface ground without doing soil testing.

b. Complete the soil testing. For this second option use the probabilities provided by the municipal worker to determine a weighted cost for this scenario.

What option would you recommend for the school? Why? Are there other non-financial considerations that you need to include in your decision?

Question 5: BSC for Not-for-Profits (10 Marks)

The following excerpt from CUPE?s (the Canadian Union of Public Employees) constitution summarizes their key objectives and strategies for achieving their objectives.

The Union has as its objectives:

a. The organization of workers generally, and in particular all workers in the public service of Canada.

b. The advancement of the social, economic, and general welfare of active and retired employees.

c. The defence and extension of the civil rights and liberties of public employees and the preservation of free democratic trade unionism.

d. The improvement of the wages, working conditions, hours of work, job security, and other conditions affecting all employees including retirees? pension benefits.

e. The promotion of efficiency in public service generally.

f. The promotion of peace and freedom in the world, and the cooperation with free and democratic labour movements throughout the world.

g. The utilization of our world?s natural and human resources for the good of all the world?s people while promoting the respect and conservation of the environment and the

creation of sustainable communities and jobs.

h. The elimination of harassment and discrimination of any sort or on any basis; for the equality of treatment regardless of class, race, colour, nationality, age, sex/gender, language, sexual orientation, place of origin, ancestry, religious beliefs, or mental and

physical disability; and the active opposition to discrimination of same wherever it

occurs or appears.

i. The establishment of strong working relationships with the public we serve and the communities in which we work and live.

The objectives of the Union are to be accomplished through the following methods:

Establishing cooperative relations between employers and employees.

Promoting required desirable legislation.

Conducting an educational program designed to enlighten the general public with respect to the problems of public employees.

Organizing and supporting central and provincial bodies of public employees for dealing with matters peculiar to a particular area or province and for assisting in the

organizational efforts of this Union.

Cooperating with the Canadian Labour Congress, its chartered federations and labour councils, its affiliates and its departments in furthering the general well-being of the whole labour movement.

Cooperating with the Public Services International and the International Trade Union

Confederation in their work.

Required:

Based on the above information, identify five measures CUPE may want to monitor on its balanced scorecard to help ensure they are achieving their objectives. Outline why each measure is important and which objective it achieves.

Question 6: Customer Profitability Analysis (5 marks)

Cloud Mobility, a provider of cell phone service, has a toll-free customer service line that is available to all of their customers. They are concerned that this free service is having a negative impact on profits.

How might customer profitability analysis help management assess whether this is the case?

Question 7: Mitigation of Risk in a Project (5 marks)

Joe?s Cookies is planning to install a new automated assembly line to prepare, cook, and package their very popular line of chocolate chip cookies. Joe?s is concerned about the project going over cost?Ace Manufacturing, the company that is designing, constructing, and installing the new equipment, is a fairly new company with an unproven track record. Joe?s has chosen Ace to manufacture their assembly line as Ace has promised a more automated process than their competitor with a good warranty program. Describe ways that Joe?s can mitigate the risk of going over budget.

Accounting 356v7 Assignment 3 Prepare your answers in a single file. Question Marks Concept Covered 1 30 Not-for-Profit Accounting 2 15 Customer Profitability 3 15 Sales Variances 4 20 Project Costing and Risk 5 10 BSC for Not-for-Profits 6 5 Customer Profitability Analysis 7 5 Risk Management Total Marks 100 Question 1: Not-for-profit Accounting (30 marks) Intercity Youth Home Intercity Youth Home (IYH) is a not-for-profit organization that provides counselling and support services to children under the age of 18. IYH typically houses teenagers who have been in trouble with the police and who have troubled home lives as well as addictions to drugs and alcohol. IYH receives most of its funding through the provincial government and private contributions. In November 2013, IYH had a major fundraising effort and was able to raise $125,000 in private contributions to purchase a group home. In April 2014, the organization was able to secure a $75,000 mortgage and purchased a house for $200,000. Since then, IYH has continued its fundraising activities and was able to raise $110,000 in donations in 2014 to be used to support the group home. The funds raised annually for the group home are used to employ several in-house social workers on an hourly basis and pay the operating expenses of the home. In addition to the group home, IYH continues to operate in separate rented premises that provided daily counselling and support services. This counselling office employs 10 social workers who also are involved in overload group home work that cannot be handled by the group home's in-house social workers. As a result of the increase in work related to the group home, and the resulting increase in the payroll costs of regular IYH social workers, IYH is currently running a deficit in its operating fund. Fundraising for the counselling activities, which is separate from fundraising for the group home, has not been sufficient to cover this deficit. A major fundraising drive to secure donations for IYH counselling services and the group home is planned for 2015. ACCT356v7 - Assignment 3 Page 4 of 7 October 30, 2014 IYH is fortunate to also have 18 volunteers who provide support services in the group home and the counselling office. You are an accountant friend of the IYH Executive Director who has asked you to make recommendations that would improve the reporting practices and transparency of the IYH. The Executive Director has said to you: As you know, our needs for private donations are greater than ever. Due to government cutbacks, government funding is being reduced and private donations have become a very important funding source. However, we are in strong competition with some other very worthy organizations for limited private funding. Recently, some of the people we have approached for private donations have suggested that our reporting practices are lacking, especially in terms of information regarding where we spent past donations, our current financial position, and our effectiveness in achieving the purposes for which we receive money. Since you are an expert in accounting and knowledgeable of accounting reporting for non-profit organizations, we were hoping you might be able to advise us how to improve our annual reporting. Could you recommend improvements to the way we are reporting financial activities so that we are in accordance with accounting standards, as well as provide suggestions to how we can improve the information value for donors? He then gave you the statement of operations and the balance sheet of IYH (see below). Intercity Youth Home Statement of Operations For the Year Ended December 31, 2014 Operating Fund: Revenues: Donations to IYH Funding from Provincial Government Investment Income Total Revenues Expenses: Staff Salaries Payroll - Social Workers Office Expenses Total Expenses Excess of Revenues over Expenses Operating Fund Bal - Jan 1 180,000 $ $ $ 250,000 2,500 432,500 $ $ $ $ 85,000 325,000 45,000 455,000 Page 5 of 7 -$ -$ 22,500 7,000 -$ Deficit - Dec 31 ACCT356v7 - Assignment 3 $ 29,500 October 30, 2014 Capital Fund: Revenues: Donations to group home Expenses: Payroll - Social Workers Operating Expenses Home Purchase Mortgage Payments Total Expenses Excess of Revenues over Expenses Capital Fund Bal - Jan 1 Deficit - Dec 31 $ 110,000 $ $ $ $ $ 65,000 35,000 200,000 8,500 308,500 -$ $ 198,500 125,000 -$ 73,500 Intercity Youth Home Statement of Financial Position As at December 31, 2014 Assets Cash Donor Pledges $ $ 12,000 12,000 $ 24,000 Liabilities Accounts Payable Mortgage Payable $ $ 4,500 75,000 Fund Balance Operating Fund Capital Fund -$ -$ 29,500 73,500 -$ 23,500 Additional Information: 1. Included in operating expenses for the Operating Fund was the purchase of a new laptop for $5000. 2. IYH maintains one bank account into which it deposits donations for both IYH and the group home. Required: Comment on ways in which IYH's reporting might be improved to enhance the informational value for donors and the accuracy of reporting according to non-profit accounting standards as set out by the CICA handbook. Provide at least 10 well-developed points. (A strong answer to this question is usually 1.5 to 2 double-spaced pages in length.) ACCT356v7 - Assignment 3 Page 6 of 7 October 30, 2014 Question 2: Customer Profitability (15 marks) Alana's Dresses Inc. is a new company that designs and manufactures custom dresses. Alana's Dresses currently has six customers that are identified by customer numbers A, B, C, D, E, and F. Besides the costs of making the dresses, the company has the following activities: Customer orders. The salespeople, designer, and dressmakers spend time with the customer. The cost driver rate is $40 per hour of time spent with a customer. Customer fittings. The customer will come for a custom fitting of their dress before the final sewing takes place to ensure the proper fit. Cost driver rate is $25 per hour of fitting time. Rush orders. Some customers need their dresses quickly. Customers are charged a $25 fee for a rush order. The cost driver rate for a rush order is $100 per rush order. Number of customer return visits. Customer may return the dresses up to 30 days after picking up the dress to have it refitted or repaired at no extra charge. Normally a refit or repair will take a seamstress 2 hours to complete. The cost driver rate is $30 per hour of the seamstress's time. Information about the six customers follows. Some customers purchased multiple items. The cost of the dress is 70% of the selling price. Customer Revenue A B C D E F Sales $600 $4200 $300 $2500 $4900 $700 Hours spent on customer order 2 7 1 5 20 3 Hours on fittings 1 2 0 0 4 1 Number of rush orders 0 0 1 1 3 0 Number of return visits 0 1 0 1 5 1 Required: a. Calculate the customer-level operating income for each customer by preparing a customer profitability analysis (similar to Exhibit 16-7 on page 808 of Reading 8 in your textbook). Rank the customers according to profitability. (10 marks) b. Are any customers unprofitable? What is causing this? What should Alana's do with respect to these customers? (5 marks) ACCT356v7 - Assignment 3 Page 7 of 7 October 30, 2014 Question 3: Sales Variances marks) (15 The Chair Company manufactures two modular types of chairs: one for the residential (home) market and the other for the office market. Budgeted and actual operating data for the year 2011 are: Static Budget Home Actual Results Office Home Office 140,000 248,400 165,600 Number of chairs sold 260,000 Contribution margin $26,000,000 $11,200,000 $22,356,000 $13,248,000 In late 2010, an office-products research firm estimated the industry volume for residential and office chairs of the type sold by the Chair company to be 2,400,000. Actual industry volume for the year 2011 was 2,200,000 chairs. Required: a. Compute the sale-mix variance and the sales-quantity variance by type of chair, and in total. (6 marks) b. Compute the market-share variance and market-size variance. (6 marks) c. What conclusions can be drawn from these variances? (3 marks) Question 4: Project Costing and Risk (20 marks) Sir John Elementary School plans to build a new playground in 2011. They received a $100,000 government grant to be used for building the playground. They are hoping to break ground in May 2011 and complete the project by the start of school in September. Before they can start the project, however, they must dismantle the existing playground according to current safety standards, the existing playground is unsafe. A number of residential properties in the community have tested positive for soil contamination, so the school also plans to complete soil testing once the existing playground is dismantled. Due to recent news articles, parents are very concerned about the potential for soil contamination and are demanding a full test to ensure their kids are not playing on a contaminated playground. Mary Chan, the school principal, has compiled the following estimates for the new playground: Cost for dismantling existing equipment $15,000 Salvage value from the metal from existing equipment Soil testing New playground equipment Cost of installation Cost of resurfacing play area in rubber Cost of landscaping (including $5,000 for gravel) Cost of removing and replacing soil $4,000 $15,000 $30,000 $15,000 $45,000 $22,000 $53,000 The costs for installation, resurfacing, and landscaping are the costs quoted by professional contractors. Mary was approached by the president of the student council, Gary Schwinger, who has volunteered his own and three other parents' time for installing and landscaping the new playground. This will save the school approximately $18,000 in costs. The school has two options in terms of dealing with the contaminated soil. The first option is to not conduct the soil testing and to simply resurface the play area with a poured-rubber matting that can cover the entire play surface. This will cost, as Mary indicated in her estimates above, approximately $45,000a large chunk of the playground budget. The other option is to perform the soil testing. A municipal worker has estimated that there is a 45% chance that the soil is contaminated. If this is the case, the school will either need to resurface the area for $45,000 or have the contaminated soil removed and replaced for a hefty cost of $53,000 plus the cost of gravel. However, there is a 55% chance that the soil will not be contaminated and the playground equipment can be installed on a gravel bed and the remediation and/or resurfacing cost will be avoided. Required: Prepare an analysis of the potential project costs for the following two scenarios. Landscaping will occur in both scenarios. There is no need for gravel, however, in the resurfacing scenario. a. Resurface ground without doing soil testing. b. Complete the soil testing. For this second option use the probabilities provided by the municipal worker to determine a weighted cost for this scenario. What option would you recommend for the school? Why? Are there other non-financial considerations that you need to include in your decision? Question 5: BSC for Not-for-Profits (10 Marks) The following excerpt from CUPE's (the Canadian Union of Public Employees) constitution summarizes their key objectives and strategies for achieving their objectives. The Union has as its objectives: a. The organization of workers generally, and in particular all workers in the public service of Canada. b. The advancement of the social, economic, and general welfare of active and retired employees. c. The defence and extension of the civil rights and liberties of public employees and the preservation of free democratic trade unionism. d. The improvement of the wages, working conditions, hours of work, job security, and other conditions affecting all employees including retirees' pension benefits. e. The promotion of efficiency in public service generally. f. The promotion of peace and freedom in the world, and the cooperation with free and democratic labour movements throughout the world. g. The utilization of our world's natural and human resources for the good of all the world's people while promoting the respect and conservation of the environment and the creation of sustainable communities and jobs. h. The elimination of harassment and discrimination of any sort or on any basis; for the equality of treatment regardless of class, race, colour, nationality, age, sex/gender, language, sexual orientation, place of origin, ancestry, religious beliefs, or mental and physical disability; and the active opposition to discrimination of same wherever it occurs or appears. i. The establishment of strong working relationships with the public we serve and the communities in which we work and live. The objectives of the Union are to be accomplished through the following methods: Establishing cooperative relations between employers and employees. Promoting required desirable legislation. Conducting an educational program designed to enlighten the general public with respect to the problems of public employees. Organizing and supporting central and provincial bodies of public employees for dealing with matters peculiar to a particular area or province and for assisting in the organizational efforts of this Union. Cooperating with the Canadian Labour Congress, its chartered federations and labour councils, its affiliates and its departments in furthering the general well-being of the whole labour movement. Cooperating with the Public Services International and the International Trade Union Confederation in their work. Required: Based on the above information, identify five measures CUPE may want to monitor on its balanced scorecard to help ensure they are achieving their objectives. Outline why each measure is important and which objective it achieves. Question 6: Customer Profitability Analysis (5 marks) Cloud Mobility, a provider of cell phone service, has a toll-free customer service line that is available to all of their customers. They are concerned that this free service is having a negative impact on profits. How might customer profitability analysis help management assess whether this is the case? Question 7: Mitigation of Risk in a Project (5 marks) Joe's Cookies is planning to install a new automated assembly line to prepare, cook, and package their very popular line of chocolate chip cookies. Joe's is concerned about the project going over costAce Manufacturing, the company that is designing, constructing, and installing the new equipment, is a fairly new company with an unproven track record. Joe's has chosen Ace to manufacture their assembly line as Ace has promised a more automated process than their competitor with a good warranty program. Describe ways that Joe's can mitigate the risk of going over budget