Topic: Greenfields Hills Apartment: Activity based costing in a service setting

Introduction:

I'm concerned about the low usage of our recreation centre. Many of the residents that don't use this facility are complaining about having to bear its costs. We need to find out what it's costing us to run this recreation centre and what it's costing to run the programs there. Maybe we should charge for every use of the facility - but if we do so, we have to know the cost.

-Mike Plaxer, GHA General Manager

In 1989, Springhill Lake Development Corporation built the Greenfield Hills Apartments (GHA) in suburban Milwaukee, Wisconsin. It is the largest apartment complex within a 10-mile radius. GHA was designed to attract young professionals, and indeed, in 2004 over three-fourths of its resident population was between the ages of 22 and 40 with a median gross income of approximately $56,000.Sixty percent of the heads of household were female. GHA consists of 20 apartment buildings with a total of 700 units -- 470 two-bedroom apartment homes and 230 one-bedroom apartment homes. In addition, there is an indoor recreation centre which has a swimming pool, a basketball court, a large exercise room with state-of-the-art equipment, two tennis courts, one racquetball court, and two meeting rooms.GHA has had an average occupancy rate of 85 percent since its opening and currently 1,615 tenants live in the apartment homes.

Operations

Mike Plaxer was hired in 1997 as General Manager to supervise the daily operations of GHA. Dave Herkovic, the Resident Manager, handles tenants' problems and requests and also shows apartments to prospective tenants. The recreation centre is managed by Steve Bermine, who organises various programs and classes. Bermine also schedules all of the meetings and activities that take place there. Dave Franks is the buildings and grounds supervisor. He is in charge of the maintenance workers, groundskeepers, and custodians. Aside from cleaning the recreation centre and apartments that are vacated, the custodians also provide cleaning services to tenants who pay a "maid service" fee. Colleen

Westing is the bookkeeper who also handles vendor payments and collections of rent and recreation centre fees. Two administrative assistants, Lisa Galaty and Joanne Birney, do the receptionist, secretarial, and other clerical work.

Costing Requests

Mike Plaxer had just received GHA's income statement for the most recent fiscal year, which ended on June 30, 2004. Exhibit 1 contains the expenses which appear on that income statement. Plaxer commented to Colleen Westing: It's fine to know things like the cost of water and supplies, but is there any way to use these costs to figure out what it costs to operate the recreation centre? I see that only about 25 percent of our residents used it this past year. Maybe it's too costly for that level of usage. Also, I keep getting flak that the rent on our two-bedroom units is 50 percent more than the rent on one-bedroom units. Do the two-bedrooms cost us 50 percent more? How can we get a handle on this?

Westing replied:Right now, we don't have any system of figuring out the cost of the recreation centre or the apartment units. Somehow we'd have to allocate costs to get what you want, but I'm not sure of the best way to resolve this, so let me contact our outside accountant, Joel Martz, and see what I can find out.

She soon met with Martz, who informed her that one option would be just to choose one allocation base to assign all the costs to the apartment units and recreation centre. He cautioned that one base might not be best for all types of costs. Martz noted, for instance, that some costs might be driven by number of residents, whereas other costs might be driven more by number of units or square footage. Furthermore, he pointed out that, in addition to finding out what it costs to run the apartment units and recreation centre, it might be useful to determine the costs of various activities like landscaping or building maintenance. Martz indicated that traditional costing systems focusing on one cost driver and not on activities would be less desirable than implementing an activity-based costing (ABC) system.

Exhibit 1: Cost Items Costs Amounts S Promotion & advertising 59.110 Maintenance & repairs 88.775 Cleaning* 82.550 Landscaping 72.950 Staff salaries 299.000 Recreation salaries 67.500 Payroll service 7.100 Motor vehicles 27.400 Water 103,650 Telephone 18.400 Supplies 15.880 Insurance 445.250 Communications 29.660 Interest 19.875 Depreciation 954.200 Heat & air conditioning 43.700 Electricity 35.900 Other 22.850 Total $2.393.750 *Note: During the year, GHA received $20,000 from Tenants who paid "maid service fees. This is not reflected here.Exhibit 2: List of Activities 1. Building maintenance & cleaning maintaining and repairing the buildings; cleaning the apartments as well as the recreation centre. Landscaping maintaining and cleaning the grounds. Marketing advertising; recruiting new residents. Resident services handling tenants' problems and requests. Purchasing dealing with all aspects of interactions with vendors and suppliers. Recreational activities providing recreational programs such as classes and pqsonal training. Recreation administration managing the recreation centre, including scheduling and organising resident meetings and any other events that take place there. Collections & accounting collecting rent and fees; bookkeeping and nancial. record- keeping. General management ofce management. human resource management etc. Exhibit 3: Time Estimates M. S. D. D. C. L. J. Plaxer Bermine Herkovic Franks Westing Galaty Birney Salary $67.000 $48.000 $41.000 $44.000 $35,000 $33.000 $31,000 Activity: Bldg. maintenance & cleaning 10% 55% Landscaping 5% 25% Marketing 10% 5% 20% 10% Resident services 20% 20% 70% 15% 10% 30% Purchasing 5% 5% 5% Recreational activities 10% Recreation admin. 60% Collections & accounting 10% 60% General mgt. 40% 5% 10% 15% 25% 85% 60% Total 100% 100% 100% 100% 100% 100% 100%Exhibit 4: Expense Distributions Expense Distribution Recreation 40% to activity 6 salaries 60% to activity 7 Motor vehicles 40% to activity 1 50% to activity 2 10% to activity 4 Water 20% to activity 2 60% to activity 4 20% to activi 6 Insurance 15% to activity 1 10% to activity 2 35% to activity 4 15% to activity 6 the remainder evenly to each of the other activities Depreciation 45% to activity 4 20% to activity 6 the remainder evenly to each of the other activities Heat & air 50% to activity 4 conditioning 25% to activity 6 the remainder evenly to activities 3. 5. 7: 8 and 9 Exhibit 5: Assignment of Activities to Cost Objects Driver Bldg. maintenance & cleaning sq. footage Landscaping sq. footage Marketing all units Resident services all residents Purchasing # residents Recreational activities directly assigl Recreation admin. directly assigl Collections & accounting # residents Cost Objects all three all three 1-bedroom units, 2-bedroom units all three all three recreation centre recreation centre all three Exhibit 6: Cost Driver Data Cost Driver lBedmom ZBedmom Recreation Ctr. Number of units 230 47'0 Number of residents 290 1,325 405 Square footage 102,000 305,000 39,000 Exhibit 7: Cost Drivers and Data for Recreation Centre Activities Bldg. maintenance & cleaning Landscaping Resident services Purchasing Recreational activities Recreation admin. Collections & accounting Rec. Ctr. Cost Objects Genera] recreation Aerobics classes Karate classes Swimming classes Tennis classes TOTAL st of Instructors liaIDNNWN Cost Driver sq. ft. sq. . # residents # residents hrs. of instruction # instructors # instructors Hrs. of 89. Ft. it of Residents Instruction 600 27.500 265 1.000 1.000 60 400 1,500 22 500 4.000 3 3 n 2.0m n ;& 39.000