This document is for the exclusive use of Marcello Girardini HBSP Product Number TCG 211 THE CRIMSON PRESS CURRICULUM CENTER THE CRIMSON GROUP, INC. Harbor City Community Center Our decit is increasing, and we obviously have to reverse that trend if we're going to become solvent. But, for that, we have to know where our costs are, in particular the cost of each of the services we offer. In March, Liz Conaway, Executive Director of the Harbor City Community Center, expressed concern to Ted Roberts, her new accountant, about the Center's cost accounting system. The exten sive funding Harbor City had received during its early years was decreasing and Ms. Conaway wanted to prepare the Center to be self sufcient, yet she lacked critical cost information. BACKGROUND Harbor City Community Center had been established 20 years ago by a consortium of commu nity groups. Situated in Torrance, an innercity residential neighborhood of Los Angeles, Califor nia, the Center provided comprehensive services to residents of Torrance and neighboring commu nities. It continued to maintain strong ties with the community groups responsible for its develop ment and subsequent acceptance in Torrance. Funding of Harbor City was initially provided by the Federal government as part of an attempt to provide broad based community services to innercity poverty areas in the United States. Two years ago, the city of Torrance supplemented Harbor City's revenue with a small threeyear grant. Because Ms. Conaway realized that foundation and government support could not continue indee nitely, she intended to make the Center selfsufcient as soon as possible. Harbor City's income statement is contained in Exhibit 1. The Center was composed of eight clientservice departments: Homemaker Service, Family Planning, Counseling, Parents' Advocacy, Mental Health, Alcohol Rehabilitation, Community Out reach, and Referral and Placement. In addition, the center had a Training and Education Depart ment. The center had 22 paid employees and a volunteer staff of 6 10 students acquiring clinical and managerial experience. Community Outreach, which had been designed by Harbor City's consumers, was a multidiscie plinary department providing a link between the health and social services at the center and the schools services of the community. The department was staffed by a parttime speech pathologist, a partitime learning specialist, and a fulletime nutritionist. The Referral and Placement Service was for clients whom the center felt, at the time it received a referral, it could not serve; the staff tried to locate another agency to serve the client. Parents' Advo cacy did not serve clients directly but rather worked on behalf of clients who were having difficulty with housing, schools, and so forth. EXISTlNG INFORMATION SYSTEM Harbor City's previous accountant had established a system to determine the cost per clientevisit (or related activity such as advocacy). According to this method, shown in Exhibit 2, the cost was a yearly average for all client visits. The accountant would rst determine the direct cost of each de partment. He would then add overhead costs, such as administration, rent, and utilities to the total cost of all the departments to determine the community center's total costs. Finally, he would divide the total by the year's number of visits. Increased by an anticipated ination gure for the following year, this number became the projected cost per visit for the subsequent year. In reviewing this method with Mr. Roberts, Ms. Conaway explained the problems she per ceived. She said that although she realized this was not a precise method of determining cost for clients, the center's cost per visit had to be held at a reasonable level in order to keep its services This case was prepared by Professor David W. Young. It is intended as a basis for class discussion and not to illus trate either effective or ineffective handling of an administrative situation. Copyright 2012 by The Crimson Group, Inc. To order copies or request permission to reproduce this document, contact Harvard Business Publications (http:/lhbsp .harvardeduf). Under provisions of United States and intema tional copyright laws, no part of this document may be reproduced, stored, or transmitted in any form or by any means without written permission from The Crimson Group (www.mecrimsongrouporg) This document is for the exclusive use of Marcello Girardini accessible to as many community residents as possible. Additionally, she anticipated complications in determining the cost per visit for each of Harbor City's departments: You have to consider that our ova'head costs, like administration and rent, have to be included in the cost per visit. That's easy to do when we have a single cost, but I'm not certain how to go about it when determining costs on a departmental basis. Furthermore, it's important to point out that some of our departments provide services to others. Parents' Advocacy, for example. There are three social workers in that department, all earning the same salary. But one works exclusively for Counseling, while another divides her time evenly between Family Planning and Home maker Service. Only the third spends his entire time in the Advocacy Department seeing clients who don't need other social services, although he occasionally refers clients to other social workers. In the Alcohol Rehabilita tion Department, the situation is more complicated. We have two parttime MSWs, each earning $48,000 a year, and one parttime bachelor degree social worker earning $32,000. The two MSWs yearly see about 1,500 clients who need general social work counseling, but they also spend about 50 percent of their time in other de partments. The BA social worker cuts pretty evenly across all departments, except referral and placement of course. Mr. Roberts added a further dimension: I've spent most of my time so far trying to get a handle on allocating these overhead costs to the departments. It's not an easy job, you know. Administration, for example, seems to help everyone about equally, yet I sup, pose we might say more administrative time is spent in the departments where we pay more salaries. Rent, on the other hand, is pretty easy: it can be done on a squarefoot basis. We could classify utilities according to us age if we had meters to measure electricity, phone usage and so forth, but because we don't, we have to do that on a squarefoot basis as well. This applies to cleaning, too, I guess. It seems that record keeping can be allo cated on the basis of the number of records, and each department generates one record per client visit. Training and Education (T&E) is the most confusing. Some departments don't use it at all, while others use it regularly.I guess the fairest would be to charge for it on an hourly basis. Since there are two people in the department, each working about 2,000 hours a year, the hourly charge would be about $16.00. But this is a bit unfair, since T&E also uses supines, space and administrative time. So we should include those costs in its hourly rate. Thus, the process is confusing andI haven't really decided how to sort it out. However, I have pre pared data on oor space and T&E usage. (Exhibit 3). As Ms. Conaway looked toward the rest of the year, she decided to calculate a precise cost g ure for each department. The center was growing, and she estimated that total client volume would increase by about 10 percent during the year, spread evenly over each department. She anticipated that costs would also increase by about 10 percent. She asked Mr. Roberts to prepare a stepedown analysis for last year so that she would know Harbor City's costs for each department. She planned to use this information to assist her in projecting costs for the current year. Assignment 1 . What is the cost per visit for each department? 2. How might this information be used by Ms. Conaway? HARBOR CITY COMNIUNITY CENTER Exhibit 1. Income Statement For the Prior Year (Ended December 31) Revenue from patient fees $1,381 ,800 Other revenue 20 000 Total revenue $1 ,401 ,800 Expenses: Program services $940,000 Record keeping 40 ,000 Training & Education 100,000 General & Administrative 368,000 1,448,000 Surplus (Decit) ($46,200) Harbor City Community Center 0 June 2012 2 of 3 This document is for the exclusive use of Marcello Girardini HARBOR CITY COMMUNITY CENTER Exhibit 2. Costs and Patient Visits for the Prior Year, By Department1 Department No. of Visits Salaries2 Others3 Total Homemaker Service 5,000 $80,000 $32,000 $1 12,000 Family Planning 10,000 20,000 60,000 80,000 Counseling 2,100 120,000 64 ,000 184,000 Parents' Advocacy 4 ,000 108 ,000 24,000 132,000 Mental Health 1,400 60,000 32,000 92,000 Alcohol Rehabilitation 1 ,500 128 ,000 32,000 160,000 Community Outreach 2,500 20,000 40,000 60,000 Referral and Placement 6,400 80 000 40,000 120 000 Subtotal 32,900 616,000 3 24,000 940,000 Administration 152,000 8 ,000 160,000 Rent 144,000 144,000 Utilities 40,000 40,000 Training and Education 64,000 36,000 100,000 Cleaning 24,000 24,000 Record keeping 28 000 12 000 40,000 Total $860,000 $5 88 ,000 $1 ,448 ,000 Number of Client Visits 32,900 Average Cost per Visit $44 .00 Notes: 1 . Client visits rounded to nearest 100; expenses rounded to nearest $1,000. 2. Includes fringe benefits. 3 . Materials, supplies, contracted services, depreciation and other nonipersonnel expenses. Exhibit 3. Floor Space and Training and Education Usage, by Department1 Department Floor Space; T SI. E Usage; Homemaker Service 1,000 1,000 Family Planning 1,300 200 Counseling 1,800 2,400 Parents' Advocacy 300 100 Mental Health 1 ,000 Alcohol Rehabilitation 500 m Community Outreach 1,100 100 Referral and Placement 1,000 200 Administration 500 m Record keeping 300 Training and Education 1,200 ; Total 10,000 4,000 Notes: 1 .Rounded to nearest 100 2.In square feet 3 .111 hours per year rounded to the nearest 100 Harbor City Community Center 0 June 2012 3 of 3