Hi,

Please put together Case 22-5 and 18-4

Using the following format:

Cover Sheet

Table of Contents

Facts

Analysis

Conclusion

Please make sure to rephrase all the content into one. I am attaching supporting documentations for both cases.

Thank you in advance,

Luis

Dakota office Products (DOP) are regional distributors for office supplies and the major clientele served by the company included institutional and commercial clients. The company distributes different types of office supplies and writing equipment. Currently the company has been able to uphold their reputation as a great distributor. They also have many distribution centers where shipments are essential to unpacking and the repacked into cartons then delivered directly to customers. Issues: a. Major pricing and costing issue for its products. b. Using the traditional costing method to compute the cost of the product provided to the clients. c. Adding Additional markup per policy to come up at the selling price of the product. d. Disregarding Activity Based Costing making the company unable to price the products realistically. e. Mispricing of the products and as a result, an overall loss to the company. Questions: 1. Why was Dakota's existing pricing system inadequate for its current operating environment? DOP Dakota Office Product utilize incorrect cost determination for new services. They used traditional costing system where direct and indirect costs are assigned, allocated to products and services delivered to customers. This traditional cost system is should be use by companies where production operations are high labor intensive and overhead costs are smaller part of total costs. For Dakota an activity based costing would be the cost system. With this system the company will be able to calculate the cost of products, services in regards to the activity and resources consumed. Example: During the year 2000 the data entry team learned that the operators worked 10,000 hrs. 2,000 hrs were spent in setting on manual customers order 7,500 hrs were spent in entering individual order lines in an order 500 hrs were used to validate an EDO order. Customer accounts were audited and two distinctive accounts of similar size and activity volumes was discovered. Customers A and Customer B each generated sales in year 2000 above $100,000. Costs of the products ordered were $85,000. The overall markups for customer A was 21.2% and for Customer B was 22.4% which fell in the range of markups targeted by DOP. Customers A and Customer B ordered 200 cartons during the year. Contribution margin for both customers were sufficient to cover normal general and selling expense. Which generated a profit for the company. However, they're service demands were quite different. Customer A had begun utilizing EDI to place orders but their orders where large. On the other hand Customer B, placed many orders leaving their order size smaller than for Customer A. Furthermore, Customer B orders were done on paper or phone ordered, which was done by manual data entry. Also 25% of Customer B orders requested the desktop delivery option. Customer A paid bills within 30 days whereas Customer B paid bills after 90 days. The average accounts receivable balance during year for A was $ 9,000, while it as $3,000 for B. Dakota paid interest of 10 % per year. 2. Develop an activity-based cost system for Dakota Office Products (DOP) based on Year 2000 data. There were four primary activities a. process cartons in and out of the facility b. new desk top delivery service c. order handling d. data entry Based on the report of distribution center team 90% of the workers process cartons in and out of the facility 10% of workers were assigned to the desktop delivery service. Total from report $2,400,000 warehouse personnel expense, $ 2,160,000 ($ 2,400,000*90%) process cartons $ 240,000 ($2,400,000 *10%) desktop delivery service. b. Calculate the activity cost-driver rate for each DOP activity in 2000. Cost-driver rate = assignment/ activity quantity. Primary Activity Process cartons in & out Activity in Detail Warehouse Personnel 90% Cost Items Purchased Desktop Delivery Service Warehouse Personnel 10% Delivery Truck Order Handling Freight Warehouse personnel (excluding personnel) Data Entry Data Entry Operators Order Entry Expense Setup manual customer Order Enter Individual Order lines in order Validate an EDI/Internet Order Assigned Cost $2,160,00 0.00 $35,000,0 00.00 $240,000. 00 $200,000. 00 $450,000. 00 $2,000,00 0.00 $800,000. 00 $160,000. 00 $600,000. 00 $40,000.0 0 Activity Quanitiy 80,000 Cost Driver Rate $464.5 per carton 2,000 $220 per carton 24,000 $102.8 per carton 150,000 10,000 $5.33 per line $80 per carton Activity 1 Rate = 90% of Warehouse Personnel Expense + Cost Items Purchased /cartons processed 90%*2,400,000+35,000,000)/80,000=464.5 per carton Activity 2: the new desktop delivery service 10% of Warehouse Personnel Expense + Delivery Truck Expenses / desktop deliveries Rate= 10%*2,400,000+200,000/2000 =220 per carton Activity 3: order handling Rate = (Warehouse Expenses + Freight) / number of orders 2,000,000+450,000 / 16,000+8,000 =102.08 per order Activity 4: data entry Rate=Order entry expenses/Order lines 800,000/150,000=5.3 orders per line - - - - Activity cost-driver rates: Activity One: process cartons in and out of the facility o Rate=(90% of Warehouse Personnel Expense + Cost o Items Purchased)/cartons processed o Rate=(90%*2,400,000+35,000,000)/80,000=464.5 $/per carton Activity Two: the new desktop delivery service o Rate=(10% of Warehouse Personnel Expense + Delivery Truck Expenses)/desktop deliveries o Rate=(10%*2,400,000+200,000)/2000=220 $/per carton Activity Three: order handling o Rate=( Warehouse Expenses + Freight)/ number of orders o Rate=(2,000,000+450,000)/(16,000+8,000)=102.08 $/per order Activity Four: data entry o Rate=Order entry expenses/Order linesRate=800,000/150,000=5.3 orders/per line 3. Using your answer to Question 2, what was the profitability of Customer A and Customer B? Customer A: Process cartons: 200 x $464.5=$92900...........Desktop delivery: 0 Order handling: (6+6) x 102.08=$1224.96......Data entry: 60 x 5.33=$319.8 Customer B: Process cartons: 200 x $464.5=$92900...........Desktop delivery: 25 x 220=$5500 Order handling: 100 x 102.08=$10208...........Data entry: 180 x 5.33=$959.4 Cost of purchased item Customer A (92900+0+1224.96+319.8) = $94444.76; Customer B (92900+5500+10208+959.4) = $109567.4 Contribution to general and selling expenses =number of cartons ordered x (general and selling expenses + Interest expenses)/cartons processed. Contribution to genera and selling expense (2,000,000+120,000)200/80,000= $5300 Customer profitability Expense Sales Cost of item purchased Contribution to General and selling expense Profit Custo mer A 103,00 0 94,444 .76 Custom er B 104,00 0 109,56 7.40 $5,300 $5,300 10867. 4 3255.2 4 Profitability for A and B is 3255.24 and neg 10867.4. 4. What explains any difference in profitability between the two customers? Number of orders made by different number of clients. Customer B chooses 150 numbers of cartons shipped commercial freight, which is a much more expensive delivery for 50 cartons than customer A. Customer A has 60 of line items, manual, and Customer B has 180 line items. Therefore B spent more order entry expense than Customer A. Customer A had 6 manual orders and 6 EDI orders for 200 cartons. Customer B had 100 manual orders for 200 cartons. Order handling is $102.08 per order. Therefore, Customer A spent $1224.96 and Customer B spent $10,208. Leaving $8983.04 more spent on Customer B. - method of delivery (customer B chooses much more expensive delivery for 50 cartons)Number of orders made by different number of clients a) Customer A had 12 customers placing an order for 200 cartons b) Customer B had 100 customers placing an order for 200 cartons More different customers placing orders means much higher costs (cost per order is $102.08). So Customer A spend $1224.96 and Customer B spend $102,08 which is $8983.04 more money spent on Customer B. 5. What are the limitations, if any, to the estimates of the profitability of the two customers? The desktop delivery per labor hour cannot be calculated because there's a difference in distance from the warehouse which makes different labor cost per delivery each time. The wage of a manual customer order and an EDI order can't be calculated because the number of order lines is uncertain. Therefore the order entry expense can't be calculated as well. - The lack of information about distance taken for desktop delivery, so we can't compute Delivery per Labor Hour because each time there is different distance from the warehouse which makes different cost per delivery. 6. Is there any additional information you would like to have to explain the relative profitability of the two customers? Would like to have to explain delivery per labor hrs, wages, number of personnel, the number of personnel working manual customer orders and EDI orders. 7. Assume that Dakota applies the analysis done in Question 3 to its entire customer base. How could such information help the Dakota managers increase company profits? If Dakota applies the analysis done in question 3 to its entire customer base the company would determine that that the traditional delivery cost system has some issues and the price for desktop delivery should be adjusted by the distance from the warehouse. For those customer placing larger orders should be given a higher prices and a discount as the same time. If they would apply to analysis from question 3 the managers would discover that delivery cost is incorrect and the price for desktop; delivery should be higher or abdicative to the distance where the order is placed. Make higher prices and for the customers who are placing big orders there should be a discount to eliminate high number of customer placing small orders. Correct the cost of whole process by determining direct labor hour. 8. Suppose that a major customer switched from placing all its orders manually to placing all its orders over the internet site. How should this affect the activity cost driver rates calculated in Question 2? How would the switch affect Dakota's profitability? If this was to take place it would affect Activity 1: Process cartons in and out of the facility and the driver -coat rate would change. Rate= EDI orders/ EDI Labor hrs Rate= 8,000/500=16 orders per hrs Total Orders / Orders per Hour = 24000/16=1500 hrs of work and when compared to 10000 hours spend before have worked 8500 hour less. So its 85% less money spent on wages. It would affect activity 4: Data entry because while using EDI cost would reduce and so the same cost per line will decrease. The Profitability would be much higher because two out of four allocation base activity cost would decline so each customer would improve profit and also number of customers placing small orders wouldn't equal will affect the profit. Also there should be a better way of collecting bills from customer so that the interest rate from credit wouldn't equal and will affect the yearly profit. According to the question 2 of the 4 activity cost driver have declined so the customer would improve the profit. It would affect Activity One: process cartons in and out of the facility and the driver-cost rate would change.Rate=EDI Orders/EDI Labor HoursRate=8,000/500=16 orders/per hour - So we would have spent A Total Orders/Orders per hour = 24,000/16=1500 hours of work and when we compare to 10,000 hours spend before we have worked 8,500 hour less so its 85% less money we spend on wages. - It also would affect the Activity Four: Data Entry because while using EDI costs would reduce and so the same cost per line would decrease.- The Profitability would be much higher because two out of four allocation base activity cost would decline so each customer would improve the profit and also number of customers placing small orders wouldn't affect that dramatically the profit. Also there should be better way of collecting bills from customers so that the interest rate from credit won't affect the yearly profit. Conclusion Case 18-4 Dakota Office Products Prepared By Young Kwang Lee For Professor C.E. Reese in partial fulfillment of the requirements for ACC 770 - Managerial Accounting School of business St. Thomas University Miami Gardens, Fla Term A2/Spring, 2016 April 21, 2016 Table of Contents Issues........................................................................................... 1 Facts............................................................................................. 1 - Analysis......................................................................................... 3 - 7 Conclusions..................................................................................... 7 Issues 1. Why was Dakota's existing pricing system inadequate for its current operating environment? 2. Develop an activity-based cost system and calculate activity cost driver rates. 3. Calculate the profitability of Customer A and Customer B. 4. What explains the difference in profitability between the two customers? 5. What are the limitations, if any, to the estimates of the profitability of the two customers? 6. Is there any additional information you would like to have to explain the relative profitability of the two customers? 7. Assume that Dakota applies the analysis done in Question 3 to its entire customer base. How could such information help the Dakota managers increase company profits? 8. Suppose that a major customer switched from placing all its orders manually to placing all its orders over the internet site. How should this affect the activity cost driver rates calculated in Question 2? How would the switch affect Dakota's profitability? Facts Dakota Office Products, hereafter referred to as DOP, is a regional distributor of office supplies to institutions and commercial businesses. DOP operates several distribution centers where they store office supplies which are then delivered to the customers when requested. Up until now, the bulk of DOP shipments have beenmade by commercial truckers. Recently DOP added a new service called \"desk top\" option where they deliver packages directly to individual locations at the customer's site for which they charge a small premium of 2%. DOP believes that the added premium could improve the margins of the company. In addition, in 1999 DOP implemented a system called electronic data interchange (EDI) followed by a new internet site in 2000. Use of EDI allowed for automated orders which saved data processing time. However, even with the use of the updated internet site, use of EDI, and added business on the \"desk top\" orders, DOP's costs continued to rise. Asa result of continued rising costs, John Malone, the General Manager, asked his controller and director of operations to help him evaluate the current business operations and recommend future actions. The controller and the director of operations, Melissa Dunhill and Tim Cunningham, went into the field to determine the cause behind continued rise in costs. First, they asked themselves why was Dakota's existing pricing system inadequate for its current operating environment? They determined that Dakota only profited when the clients placed large orders. They also determined that real drop in profit occurred if many clients placed small orders. In addition, they believe they need a better structure for determining cost on products since they are losing money while their cost of keeping staff, rent, delivery have gone up. In particular, they determined that they need to look at re-structuring the cost of the new services such as \"desktop\" delivery. While the desktop service attracts new customers, inadequate mark-up of up to 2% for delivery does not cover the costs of providing the service. Another possible area to change is the cost determination for the individual customers. To test out the current pricing margins, they looked at Activity Based Cost System to analyze the 2000 data. Then, utilize the Activity Based Cost System to compute the allocation rates for each of the identified cost pool and associated cost drivers for the activity. In doing so, they can determine what areas should assume greater allocation rates and which areas should not get the additional allocation. DOP has four main activities that cause overheadto be incurred. The activities are: driver rates to process carts in and out of facility, new desk topdelivery service, order handling, and data entry. Analysis 1. Why was Dakota's existing pricing system inadequate for its current operating environment? - profits only when clients placed large orders for cartons - real drop of profit if many clients place small orders - wrong cost determination for individual customers - wrong cost determination for new services provided by DOP (to small charges for the \"desktop\" delivery, then the actual cost of it) DOP's has chosen to use a traditional cost pricing system where direct and indirect costs are assigned and allocated to products and services delivered to clients. This system has proven beneficial for companies whereproduction operations are high labor intensive and overhead costs are smaller part of total costs. Nowadays, when automation and technology are ubiquitous overhead costs make up much higher percentage and are often lumped together with direct labor costs. An ABC approach would be much more appropriate for the DOP's business as it will calculate costs of products and services based on the activities involved and resources absorbed. Furthermore, the DOP's pricing system is described as 'independent of the specific level of service developed' which automatically signals for the cross-subsidies phenomenon where some services' costs are understated and others overstated. This happens in companies where overhead costs are too complex for the simple overhead allocation system used as it is at DOP. 2. Develop an activity-base cost system for Dakota Office Products based on Year 200 data. Calculate the activity cost-driver rate for each DOP activity in 2000. Activity cost-driver rates: Activity One: process cartons in and out of the facility Rate = (90% of Warehouse Personnel Expense + Cost o Items Purchased)/ cartons processed Rate = (90%*2,400,000+35,000,000)/80,000 = 464.5 $/per carton Activity Two: new desktop delivery service Rate = (10% of Warehouse Personnel Expense + Delivery Truck Expenses)/ desktop deliveries Rate = (10%*2,400,000+200,000)/2000 = 220 $/per carton Activity Three: order handling Rate = ( Warehouse Expenses + Freight) / number of orders Rate = (2,000,000+450,000) / (16,000+8,000) = 102.08 $/per order Activity Four: data entry Rate = Order entry expenses / Order lines Rate = 800,000/150,000 = 5.3 orders/per line 3. Using your answer to question 2, calculate the profitability of Customer A and Customer B. Activity One: process cartons in and out of the facility -> Number of cartons ordered Activity Two: the new desktop delivery service -> Number of desktop deliveries Activity Three: order handling -> Number of orders (manual + EDI) Activity Four: data entry -> Number of line items Manufacturing Overhead cost-driver rates Customer A Customer B Customer A* Customer B* Activity One 464.5 200 200 92900 92900 Activity Two 220 0 25 0 5500 Activity Three 102.08 12 100 1224.96 102,08 Activity Four 5.3 60 180 318 94,442.96 954 109,562 Profitability: Contribution to general and selling expenses = number of cartons ordered * (general and selling expenses + Interest expenses)/cartons processed Customer A Customer B Sales Cost of Items Purchased 103,000 94,442.96 104,000 109,562 Contribution to general and selling expenses, and profit 200*2, 120,000/80,000 = 5300 5300 Profit 3257.04 - (10,862) 4. What explains and difference in profitability between the two customers? - method of delivery (customer B chooses much more expensive delivery for 50 cartons) - Number of orders made by different number of clients - Customer A had 12 customers placing an order for 200 cartons - Customer B had 100 customers placing an order for 200 cartons More different customers placing orders means much higher costs (cost per order is $102.08). So Customer A spend $1224.96 and Customer B spend $102,08 which is + $8983.04 more money spent on Customer B. 5. What are the limitations, if any, to estimates of the profitability of the two customers? - Lack of information about distance taken for desktop delivery, sowe can't compute Delivery per Labor Hour because each time there is different distanceform the warehouse which makes different cost per delivery. = Even though the estimates of profitability may gives many advantages for comparison limitations would be the requirement to estimate cost of capital in order to calculate the profitability index and it may not give the correct decision when used to compare mutually exclusive projects. Customer B makes an average payment for services much later than customer A does. The sooner the payment can be received the more profitable they can become because the funds could be invested and earning interest instead of losing the opportunity cost by financing the less profitable company's products and services for so long. 6. Is there any additional information you would like to have to explain the relative profitability of the two customers? The rate of profitability is calculated as (surplus-value)/(capital investment). Knowing these factors would help DOP to achieve higher sales per worker the more they invest per worker. Possible "Prisoner's dilemma" must be avided. Any other component costs of delivered goods and any other operating (or other) expenses not expressed in the evaluation. Additionally, DOP may want to consider raising the prices of some of their services and try to move the less profitable customer to the less costly services. 7. Assume that Dakota applies the analysis done in question 3 to its entire customer base. How could such information help the Dakota managers increase company profits? If they would apply to analysis from question 3 the managers would discover that delivery cost is incorrect and the price for delivery should be higher or abdicative to the distance where the order is placed. Also make higher prices and for the customers who are placing big orders there should be a discount to eliminate high number of customer placing small orders and correct the cost of whole process by determining direct labor hour. 8. Suppose that major customer switched form placing all its orders manually to placing all its orders over the interest site. How should this affect the activity cost driver rates calculated in question 2? How would the switch affect Dakota&s profitability? - It would affect Activity One: process cartons in and out of the facility and the drivercost rate would change. Rate=EDI Orders/EDI Labor Hours Rate=8,000/500=16 orders/per hour So we would have spend Total Orders/Orders per hour = 24,000/16=1500 hours of work and when we compare to 10,000 hours spend before we have worked 8,500 hour less so its 85% less money we spend on wages. - It also would affect the Activity Four: Data Entry because while using EDI costs would reduce and so the same cost per line would decrees. - the Profitability would be much higher because two out of four allocation base activity cost would decline so each customer would improve the profit and also number of customers placing small orders wouldnt affect that dramatically the profit. - Also there should be bather way of collecting bills from customers so that the interest rate from credit wouldnt affect the yearly profit. Conclusion Profitability must be improved at DOP. Profitability can be ensured and unexpected losses can be avoided through use of activity-based costing and pricing at the company. The current cost allocation system at DOP provides inadequate information to manage the business for a profit. For the services provided, DOP prices are too low to be profitable. The example of two \"similar\" customers with very dissimilar activities illustrated the blind spots with the current cost system at DOP. The proposed activity-based costing system would provideinformation necessary for improved pricing. Customers should understand the cost drivers for DOP's business. Education will aid customers' deliberate choice of services with the highest value to them.Extension of the analysis of relative profitability to the entire customer base has value asa test of overall profitability for DOP. Use of the method outlined here will also provide clarity and confidence surrounding individual customer profitability. But, new pricing would be higher and could lower demand. Major customers will likely expect advantaged pricing or service concessions. Price increases should be fine-tuned to maximize demand and profit though estimates and experiential determination of the demand vs.price effect. Finally, past performance has value to predict future cost drivers but should be revisited annually or more frequently if needed. This is because major shifts in the balance of services provided by DOP could significantly change the cost drivers. Case 22- 5 Piedmont University Case 22-5 PIEDMONT UNIVERSITY* Prepared by For Professor C.E. Reese in partial fulfillment of the requirements for ACC 770 - Managerial Accounting School of Business/Graduate Studies St. Thomas University Miami Gardens, Fla. Term A2/Spring, 2013 April 22, 2013 TABLE OF CONTENTS Issues..............................................................................................................................1 Case 22- 5 Piedmont University Facts...............................................................................................................................1 Analysis..........................................................................................................................6 Conclusions..................................................................................................................10 Case 22-5 Piedmont University* 1 ISSUES 1. How should each of the issues described above be resolved? 2. a. Do you see other problems with the introduction of profit centers? b. If so, how would you deal with them? 3. What are the alternatives to a profit center approach? 4. Assuming that most of the issues could be resolved to your satisfaction, would you recommend that the profit center idea be adopted, or is there an alternative that you would prefer? FACTS When Hugh Scott was inaugurated as the 12th president of Piedmont University in 1991, the University was experiencing a financial crisis. For several years enrollments had been declining and academic costs had been increasing. The resulting deficit had been suppressed by using the principle of \"quasi-endowment\" funds for operating purpose as the principle legally could not be used. Mr. Scott immediately raised tuition, froze faculty and staff hiring's and instituted measures to curtail operating costs. In the year ended June 1993, there was a small operating surplus. In 1993, Neil Malcolm, a Piedmont alumnus and partner of a local management consulting firm, volunteered to examine the situation and make recommendations for enduring measures to maintain the university's financial health. Malcolm spent about half of his time at Piedmont for the next several months and had many conversations with senior administrative officers, and other trustees. Early in 1994 he submitted his report; it recommended increased recruiting and fundraising activities, but its most important and controversial recommendation was that the university be reorganized into a set a profit centers. Case 22-5 Piedmont University* 2 At that time the principle means of financial control was an annual expenditure budget by the Deans of each of the schools and the administrative heads of support for departments. After a dean or department head discussed a budget with the president and financial vice president, it was usually approved with only minor modifications. There was a general understanding that each school would live within the faculty size and salary numbers in its approved budget, but not much stress was placed on adhering to the other items. Malcolm proposed that in the future the deans and other administrators submit budgets covering both the revenues and the expenditure for their activities. The proposal also involved some shift in responsibilities, and new procedures for crediting revenues to the profit centers which earned them and charging expenditures to the profit centers responsible for them. He made rough estimates of the resulting revenues and expenditures of each profit center using 1993 numbers. University-wide administrative costs would be allocated to profit centers in proportion to the relative costs of each. The graduate school Deans regarded this as unfair as many costs incurred by the administration were in fact closely related to the undergraduate school. Furthermore, they did not like the idea of being held responsible for an allocated cost that they could not control. Endowments: The revenue from annual gifts could be reduced by the cost of foundation-raising activities. The net amount of annual gifts plus endowment income (except gifts and annual income from endowment designated for a specified school) would be allocated by the president according to his decision and needs of each school - subject to the approval of the Board of Trustees. The Deans thought this was giving the President too much authority. They did not have a specific alternative, but Case 22-5 Piedmont University* 3 thought that some way of reducing the President's discretionary powers should be developed. Athletics: Piedmont's athletic teams did not generate enough revenue to cover the costs of operating the athletic department. The proposal was to make this department self-sufficient by charging fees to students who participated in intramural sports or who used the swimming pool, tennis courts, gymnasium, and other facilities as individuals. Although there was no strong opposition, some felt that this would involve student dissatisfaction, as well as increased paperwork. Housekeeping: Each school had a maintenance department that was responsible for housekeeping in its section of the campus and for minor maintenance jobs. Sizable jobs were performed at the school's request by a central maintenance department. The proposal was that in the future the central maintenance department would charge schools and other profit centers for the work they did at the actual cost of the work, including both direct and overhead cost. The Dean of the business school said that this would be acceptable, so long as the opportunity to have maintenance work done by an outside contractor is acceptable if the price was lower than that charged by the maintenance department. Malcolm explained that he had discussed this possibility with the head of maintenance, who opposed it on the grounds that outside contractors could not be held accountable for the high quality standards that Piedmont required. Informatics: Currently, the principle mainframe computers and related equipment were located in and supervised by the engineering school. Students and faculty members could use them as they wished, subjected to an informal check on overuse by people in the computer rooms. About one-fourth of the capacity of these computers was used for administrative work. A few departmental mainframe Case 22-5 Piedmont University* 4 computers and, hundreds of microcomputers and word processors, were located throughout the university, but there was no central record of how many there were. The proposal was that each user of the engineering school computers would be charged a fee based on usage. The assessed fee would recover the full cost of the equipment, including overhead. Each school would be responsible for regulating the amount of cost that could be incurred by its faculty (and students) so that the total cost did not exceed the approved item in the school's budget. The mainframe computers had software that easily attributed the cost to each user). Several Deans, however, objected to this plan. They pointed out that neither students nor faculty understood the potential value of computers and that they wanted encourage computer usage as a significant part of the educational and research experience. A charge would have the opposite effect, they maintained. Library: The university library was the main repository of books and other material, and there were small libraries in each of the schools. The proposal was that each student and faculty member who used the university library would be charged a fee, either on an annual basis, or in some basis related to the time spent in the library or the number of books withdraws. The library had a secure entrance at which a guard was stationed, so a record if who used it could require, but it was not regarded as being as some of the other items. Cross registration: Currently, students enrolled at one school could take courses at another school without charge. The proposal was that the school at which a course was taken would be reimbursed by the school in which the student was enrolled. The amount charged would be the total semester tuition of the school at which the course was taken, divided by the number of courses that a student normally would take in a semester, with adjustments for variations in credit hours. Case 22-5 Piedmont University* 5 Case 22-5 Piedmont University* 6 ANALYSIS 1. (a) Central administrative costs: Presently, an administrative cost is not assessed (university-wide) against academic departments. It is proposed that these costs are objectively allocated to each department as such costs contribute to the University profit margin indirectly. Although ancillary profitability is hard to translate to bottom-line figures (i.e. admissions) there are easily measured metrics which may be used to quantify the value extended to the entire organization and thus, assign reasonable prices for the managerial services rendered. Therefore, all profit centers should rightfully contribute to the administrative costs of the University. (b) Endowment: It is suggested that the revenue from annual gifts be reduced by the cost of fund-raising activities. We agreed that the surplus revenue should be equitably distributed by the President (who, in conjunction with the Board of Trustees and representatives from the various departments) endorses a policy which specifies how funds are impartially apportioned within the educational system. (c) Athletics: At present, athletic teams do not generate sufficient revenue to cover the costs of operating the athletic department. Therefore, it is recommended that students are assessed [through their tuition] fees related to athletic subsidies. Facilities may also be open to the general public (for an added fee) as an additional source of revenue stream. However, it is more appropriate to consider the athletics department as an expense center as it will never provide a direct financial benefit to the University. (d) Maintenance: Each school currently has a maintenance department which is responsible for housekeeping (and minor jobs) in its respective sections of the campus. We agree with the plan that the central maintenance department charges the university (and allied profit centers) for the work they perform at the actual cost of such work - including both direct and overhead costs. In addition, the profit centers Case 22-5 Piedmont University* 7 should have the right to deal with outside contractors who are able to guarantee the quality of their work - even more so if their prices are lower. Moreover, we believe that the central consolidation of all maintenance departments is in the best interest of the University, eliminating duplication of services, administrative overhead and labor costs. (e) Informatics: Currently, there is no mechanism of responsible accounting with re to computer usage and/or IT capital equipment; this requires immediate correction through the development of an inventory and cost accounting system. Moreover, as in any other profit center, we agree that the appropriate fees should be assessed to students (and their departments) based on resource usage. Accordingly, students should have this fixed fee assessed against them as part of their tuition whereas departments should be weighted (i.e. quarterly) and expensed based upon their habitual pattern. (f) Library: The University library is the main repository of books and other academic material, and there are also small libraries in each of the schools. The proposal is that each student and faculty member who uses the library be charged a fee, according to their respective usage and/or number of books borrowed. We believe that all students should have a fixed resource fee assessed against them (as part of their tuition expense) which covers the services afforded by the library. However, it is more appropriate to consider the library as an expense center as it will never provide a direct financial benefit to the University. (g) Cross registration: Currently, students enrolled at one school could take courses at another school without charge. We agree with the proposal that the school [at which a course was taken] is remunerated by the school where the student is presently enrolled, with adjustments for variations in credit hours. Please see allocation of expenditures - Table #1 and 2 Case 22-5 Piedmont University* 8 2. (a) Formerly, the principle means of financial control was an annual expenditure budget by the deans of each school and/or the administrative heads of support for each department. However, there are some complexities involved with the introduction of the profit centers. For instance: Profit centers do not recognize non-monetary factors, such as the quality of an education. Resolution: Implementation of the Management by Objections [MBO] method which defines the objectives within an organization so that management and employees agree to the key principles and understand what they need to do in order to achieve them. The essence of this method is participative goal setting, choosing courses of actions and decision making. Resolution: Balanced Scorecard: this strategy performance management tool (which is comprised of a mixture of financial and non-financial measures) can be used by University leadership to keep track of the performance activities (of the various schools) and to monitor the aftereffects of these actions. The application of this approach may be most appropriate when a school remains unprofitable [as in the case of the Science and Theology programs at Saint Thomas] recognizing other value outside of profit. In addition, the practical development of policies in the areas of student recruitment and fundraising should occur as the development of parallel and competing activities are likely to occur. 3. Separate from the \"revenue and expense centers\Case 22-5 Piedmont University Prepared by Quanyi Liu For Professor C.E. Reese in partial fulfillment of the requirements for ACC 770-Managerial Accounting School of Business Graduate Studies St. Thomas University Miami Gardens, Fla. Term A7/Fall, 2015 December 3, 2015 Table of Contents Issues................................................................................................ 1Facts................................................................................................ 1 Analysis ...........................................................................................4 Conclusions ......................................................................................6 Issues 1. How should each of the issues described above be resolved? 2. A. Do you see other problems with the introduction of profit centers? B. If so, how would you deal with them? 3. What are the alternatives to a profit center approach? 4. Assuming that most of the issues could be resolved to your satisfaction, would you recommend that the profit center idea be adopted. Is there an alternative that you would prefer? Facts In 1991, Hugh Scott was the 12th president of Piedmont University. The university has a financial crisis for several years that increasing costs and enrollment rates have been declining. The resulting is using the principal of \"quasi-endowment\" funds had been made up deficit. Only the income on these funds would be used for operating purposes, but it had been accumulated out of earlier years' surpluses were nearly exhausted. Therefore, he develops measures to solve the situation that raised tuition, froze faculty and staff hirings, and curtailed operating costs. There was a small operating surplus in the year ended June 30, 1993. After that Scott found Neil Malcolm who a Piedmont alumnus and partner of a local management consulting firm ask for help. Malcolm was happy and made the following work that examines the situation and conversations with Scott, other administrative officers, and trustees. Then he makes recommendations for the university's financial health. In 1994, he submitted his report that the university be reorganized into a set a profit centers and increased recruiting and fundraising activities. At that time, the deans of each of the schools and the administrative heads of support departments submitted an annual expenditure budget, then discuss with the president and financial vice president for minor modifications. Malcolm proposed that the deans and other administrators submit budgets include revenues and expenditures for their activities in the future, and charging expenditures to the profit centers responsible. He made rough estimates of 1993 impact of the proposals in Exhibit 1. In the University Council have several discussions about the proposal with the president, academic deans, provost, and financial vice president. Primarily about these aspects that central administrative costs, gifts and endowment, athletics, maintenance, computers, library, and cross registration there are some supporting and opposing views. Charged administrative costs were not in academic departments of universitywide. Proposal on central administrative costs that these costs would be allocated to profit centers in proportion to the relative costs of each. But the graduate school deans disagree. Because many costs incurred by the administration were related to the undergraduate school, and they do not want to take responsibility for an allocated cost that they could not control. The revenue from annual gifts would be reduced by the cost of fund-raising activities. The net amount of annual gifts plus endowment income would be allocated by the president according to each school needs and the Board of Trustees to approve. But deans thought this was giving the president too much authority need to reducing the president's discretionary powers. Due to Piedmont's athletic teams did not have enough revenue to operating the athletic department. The proposal was charging fees self-sufficient by students who participated in intramural sports or who used the sports equipment. Although this would bring student dissatisfaction and new paperwork, there was no strong opposition. Each school had a maintenance department for housekeeping and minor maintenance jobs. The proposal was that in the future the central maintenance department would charge schools and other profit centers the actual cost of this work, including both direct and overhead costs. The dean of the business school thought if the price was low would be provided to an outside contractor. But other people worried about it. Students and faculty members could use the principal mainframe computers and related equipment was located in the engineering school. These computers about onefourth was used for administrative work. The proposal was that the engineering school computers' user would be charged a fee on usage, it would recover the full cost of the equipment including overhead. But several deans oppose it. They wanted to encourage use of computer is a significant part of the educational and research experience. Proposal on library costs that each student and faculty member who used the university library would be charged a fee. There is opposition due to it is not important. And proposal on cross registration costs that a course was taken would be reimbursed by the school when the student was enrolled. The credit hours will be adjustment. Analysis 1. There are a few of views on various to departments or sub-organizations, as below: (1). The functions of central administrative should be defined as the revenue center. Administration fees should be accountable as the university costs, however that does not allocation to schools. The Government should take responsibility. (2). The gifts and donations should be one part of the central management. The university should absorb students to contribute the donations, so that this part of donations will be used as the cost of funds. (3). The third part is about the athletics of this university. Athletics should be a profit center. Users who joined in the athletics should be charged an annual fee for each year. If this university does like this, that should be analyzed as the break-even goal and cost recovery. (4). Maintenance's main function should be as an expense centre. A few of basic fees if this university may also be bided by seeking outside to raise external costs. (5). The computer department's main function should also be acted as an expense center. The reason that this university should so is to improve record and assigned to the university's responsibility. There should not be any monitored and controlled for computer system. (6). The libraries' main function should be acted as an expense center like others. Students in this university should be charged a fixed annual fee in context of library, which should be included within their tuition fees. (7). The last one is about the cross registration status quo. The suggestion is to charge no fee. That means to maintain collegial spirit. 2. A. There are some complexities involved with introduction of profit centers. The issues and resolution is listed below: B. (1). The approach of Profit Center doesn't recognize non-monetary factors, for example, the quality of education and scholarship. I suggest the solution is to pay more attention on core values (MBO (Management by Objectives) & Balanced Scorecard). (2). There might be competing activities between different profit centers. For example, the Campus Placements and Cultural events Alumni may have competitive activities. So that I think the solution here is with the president's leadership they need requirement of better coordination. (3). There is some situation that schools are unprofitable. Some schools may never be profitable yet may still be essential to goals and objectives of university. Profit centre approach not meaningful in this case. Discretionary expense centre approach would be more appropriate. (4). Unanticipated risks, for example, school's competing for students, staff strikes, student dissatisfaction, faculty disenchantment, reputation of university. The solution therefore is to have responsibility centers approach. 3. Profit should be defined in non-monetary terms with stress on performance measures. For instance individual schools should be gauged on following: (1). Performance Grades & their acceptability by reputed universities. (2). Graduates' employment rates. (3). National & international scholarships, awards & accreditations. (4). Survey students and employers for satisfaction. (5). Trends in enrollment. The support functions should be analyzed based on historical costs and costs compared to market costs. In present environment the intent should be to minimize focus on 'profit' and focusing on the vision and goals of Piedmont University. Some of the prime issues are that students already paying more and are not allowed increasing faculty. Piedmont University should focus on academics and rebuild quasiendowment. 4. Profit center approach involving the introduction of the most important problem is the senior management who loss the controller, management of decline in the quality of the land transfer price friction problems and common costs and organizational units of the competition. Therefore, the profit center approach is adequate, but not necessarily profit focused "approach." Profit "should be to achieve the school's goals to measure, however, still must give priority to financial management, while common sense and organizational culture play crucial role. Exact solution, so, MBO or balanced scorecard management capabilities and enhanced technologies such as application management to ensure goals. Conclusions 1. The functions of central administrative should be defined as the revenue center. The gifts and donations should be one part of the central management. The third part is about the athletics of this university. Maintenance's main function should be as an expense centre. The computer department's main function should also be acted as an expense center. The libraries' main function should be acted as an expense center like others. The last one is about the cross registration status quo. 2. The approach of Profit Center doesn't recognize non-monetary factors. Solution is to pay more attention on core values. There might be competing activities between different profit centers. Solution is with the president's leadership they need requirement of better coordination. Some schools may never be profitable yet may still be essential to goals and objectives of university. Discretionary expense centre approach would be more appropriate. There are some unanticipated risks. The solution is to have responsibility centers approach. 3. Some schools should pay attention on: (1). Performance Grades and their acceptability by reputed universities. (2). Graduates' employment rates. (3). National & international scholarships, awards & accreditations. (4). Survey students and employers for satisfaction. (5). Trends in enrollment. The support functions should be analyzed based on historical costs and costs compared to market costs. In present environment the intent should be to minimize focus on 'profit' and focusing on the vision and goals of Piedmont University. 4. The profit center approach is adequate, but not necessarily profit focused "approach". "Profit" should be to achieve the school's goals to measure, however, still must give priority to financial management, while common sense and organizational culture play crucial role. Exact solution, so, MBO or balanced scorecard management capabilities and enhanced technologies such as application management to ensure goals