Welcome to the Spring 2024 version of the comprehensive assignment prepared specifically for Accounting 362.
Made up of 2 parts this assignment is meant to fulfill a number of objectives for you. These include:
1) Test and apply your knowledge of the concepts of advanced management accounting.
4) Provide for an additional method of evaluation of your knowledge and skills rather than the traditional tests.
Please take all parts of this assignment seriously. This is an opportunity to actually apply your knowledge rather than just memorize a textbook.
Please prepare the assignment using either Word or Excel rather than by hand. The finished product will look more professional as well as create some consistency between submissions.
All submissions must be on 8 1/2 by 11-inch paper using a size 12 font (Times New Roman or Arial), single space, double space, or anything in between. Use your judgment. Grammar and spelling are very important, and marks will be deducted for poor grammar and spelling.
For the memos, please use a memo format. Examples of this can be found in Word. Write in a form. that is understandable and answers the client's question.
The two parts of the case assignment are worth a total of 20% of your final grade in this course. This part (Case Part 1) is worth 10% which has a significant effect
on your final letter grade. Making a submission on time even if incomplete, will be more to your benefit than giving up and not making any submission at all. Case
Each part of this assignment is an individual assignment. All submissions are required to be your own words and calculations. While it is recognized that students may discuss concepts and ideas, each student is required to construct their own response. You are not allowed to share/exchange your written answers or computations with others. Otherwise, you will be reported for cheating. In the event that the responses prepared by individual students appear to be the same or highly similar the instructor will consider referring the students to the Faculty of Management Academic Misconduct Committee for consideration.
Plagiarism
Integrity in academic work is a central element of learning and is the basis of intellectual pursuits in any academic community. It is also your responsibility to abide by the Student Conduct Code and Student Academic Code of Conduct.
Academic misconduct will not be tolerated. Academic misconduct includes, but is not limited to, giving and receiving information during any test or exam; using unauthorized sources of information during any test; plagiarizing; fabrication, cheating, and, misrepresenting the work of another person as your own; facilitation of academic misconduct; and under certain conditions, non-attendance.
Plagiarism, intentional or not, will not be tolerated. You must reference your work and acknowledge sources with in-text citations and a complete list of references. This includes direct and indirect quotes, diagrams, charts, figures, pictures and written material.
For group projects, responsibility for academic integrity, which can result in academic misconduct and its resulting penalties, rests with each person in the group and sanctions would be borne by each member. More details on Academic Misconduct are set out in the Student Conduct Code and Student Academic Code of Conduct Policies in the current Vancouver Island University calendar. The complete policies are located online at:http://www.viu.ca/policies/policies-index.asp
Generative AI (Including ChatGPT) Not Permitted
The use of generative artificial intelligence tools or apps for assignments in this course, including tools like ChatGPT and other AI writing or coding assistants, is prohibited. Any work submitted must be your own original work. Any use of generative artificial intelligence (AI), including
ChatGPT, is prohibited and constitutes academic misconduct. Any student suspected of submitting work that includes AI generated content maybe asked for preliminary work or other materials to evidence the student’s original and unaided authorship. The student may also be asked to separately explain or support their work. AI identification methods may also be employed by the instructor. After review, if it is determined by the instructor that submitted work likely contains AIgenerated content, the work may receive a zero and maybe subject to further misconduct measures set out in the Academic Integrity Policy (96.01) and Procedure
(96.01.001).
Referencing
Faculty of Management (Business) requires the APA style of referencing for academic papers. Resources for using APA are available from the VIU Writing Centre (Library, Room 474). You can find their hours of operation and access to online student resources (including tutorials and a printable Quick Guide) at: Writing Centre | Vancouver Island University | Canada (viu.ca) https://services.viu.ca/writing-centre.
Mustafa Day Care Center
No crying babies
YOUR ROLE
While you believe that you are a student currently taking Accounting 362, for this assignment
you are in fact anew employee of the Chartered Professional Accountant firm Collins and
Homes (CH). The Mustafa Day Care Center, Inc (MDCC) hired CH as external consultants to
help them improve their current operations and to achieve their strategic objectives consistent
with their mission. CH specializes in providing accounting and consulting advice and analysis
for businesses. You, as an employee of CH, are expected to write memos, conduct research,
perform. quantitative and qualitative analysis as well as provide clear recommendations. At all
times, work submitted must be professional both in terms of content as well as presentation. This is not high school or university but rather the real world. Do the work as if your job depends on it, because it does!!
MUSTAFA DAY CARE CENTER (MDCC)
The Mustafa Day Care Center, Inc. (MDCC) began operations in a vacant warehouse retrofitted
with bathrooms and kitchen facilities. MDCC’s mission is to provide quality, affordable
childcare to the residents of the community and surrounding area. The service area is a rural,
economically depressed town that continually ranks in the lowest 10 percent of per-capita
income in the country. The organization’s seven-member board of directors is comprised of
volunteer representatives from various agencies throughout the community–the school district, community college, hospital, Services BC, etc. The board members bring a breadth of human
services experience to the oversight of the day care, but most do not possess an accounting or
financial background. While they were committed to the financial viability of the day care, they initially focused on the center’s mission–to provide affordable childcare to working-class
families. As a result, the board set childcare rates to achieve their goal of affordability rather than assuring adequate revenues to provide high-quality services while reaching breakeven points.
From its founding,the center faced another significant challenge. The center was the first of its kind in the community, so negative perceptions about using “institutionally” provided day care were prevalent. Local families preferred to use in-home childcare provided by friends or relatives. These perceptions and preferences, coupled with poor administrative practices, caused the center to struggle continually to meet its financial obligations. MDCC was almost forced to close its doors on more than one occasion. The financial performance of MDCC is not unusual, as many community-based day care facilities struggle to remain open.
DAY CARE INDUSTRY REVENUE AND COST PATTERNS
As an industry, day care facilities generally operate with very low profit margins. Typical for-
profit day care profit margins are approximately 4 percent, with about 70 percent of a center’s
total costs attributed to wages and other employee-related costs. In British Columbia there is a
legislation to protect and promote the health, safety, and well-being of vulnerable children, youth
and adults receiving care in licensed care facilities. This legislation is the Community Care and Assisted Living Act, Child Care Licensing Regulation and Residential Care Regulation. The
licensing regulations drive a significant level of employee-related costs. These regulations
mandate a strict staff-to-child ratio that all licensed facilities must follow. For example, infant care (ages two weeks to two years) regulations require at least one staff member for every four children (see excerpt from regulations in Exhibit 1). Thus, if a center pays just the minimum
wage (currently $12.65 per hour, $15 per hour with taxes and benefits), at least $3.75 per hour would need to be charged for each infant just to cover the cost of the employee. Additionally, one must consider how revenues are affected when there are fewer than four infants per employee scheduled in the nursery. When the ratio drops, income per hour drops; however, the full hourly wage to the employee remains the same and an immediate loss occurs. See Exhibit 1 for the complete staff ratio requirements.
In addition to labour, other costs that impact day care center operations include occupancy costs, food, insurance, supplies, and programming expenses. Occupancy and food costs are also highly influenced by the Community Care and Assisted Living Act, as a facility must provide a minimum amount of space per child (based on age) and follow specific nutritional guidelines in preparing meals and snacks.
MDCC PLANNING AND OPERATIONS
About five years into operations, a new board of directors was appointed, and strategic objectives were developed. As its first strategic actions, the board replaced the Center’s administration and developed specific operating procedures to keep the facility afloat financially. To eliminate the community’s negative perceptions of institutionalized childcare, the board decided to move the center to a higher-quality facility. After further study, the board concluded that constructing a new facility would be the best option for providing quality childcare in an attractive and safe environment. In addition, the new building would house the First Nation’s Aboriginal Head Start program and the local school district’s handicapped pre-school program, as these programs were housed in inadequate facilities. Thus, the MDCC board spearheaded the construction of an 8,000-square-foot building that would be owned by MDCC, Inc., and funded in part by a government loan to support B.C.’s rural development.
During the planning and construction of the new facility but prior to its opening, the MDCC board had to resolve a few issues. First and foremost, the board did not want to raise the
childcare rates, for fear that doing so would deter people from patronizing the facility. On the
other hand, the board was not at all positive that the existing rates would cover the costs
associated with the new building. In addition, MDCC was becoming a landlord, and this created additional concerns for the board. MDCC agreed to lease floor space or rooms to the First Nation and school district, perform. facility maintenance, and provide utilities. MDCC did not provide
any furniture or fixtures. The board’smain question: How much rent should MDCC charge the
tenants? The MDCC board researched the lease rates charged to the area’s commercial retail
facilities and determined that $20 per 100 square feet was the going rate and decided to charge
their tenants at this rate. Because the board members were not experienced in making financial
and capital expenditure decisions, they did not fully consider that this rate was for floor space
only; commercial leaseholders typically pay all of their own utilities, sanitation, and maintenance fees. Thus, the board had inadvertently created the potential for a future financial crisis for
MDCC. Selected post-construction revenues, costs, and operational information for MDCC follow.
MDCC COST STRUCTURE
LABOUR COSTS
MDCC maintains a staff of employees assigned to each age-level classroom that is in compliance with regulations. The staff schedule is rotated throughout the week so that the staff-to-child ratio
is always maintained while no one employee works more than 40 hours per week. The employer’s labour costs include payroll taxes and benefits arepresented in Exhibit 2.
FOOD COSTS
The center provides food for MDCC patrons, but it does not charge a separate fee to recover the cost of snacks or meals. The cost of food is included as part of the tuition fee. In addition, the employees are required to remain on-site during the lunch hour in order to maintain the staff-to- child ratio, so their meals are also provided by the center. All children and classroom staff receive breakfast, lunch, and two snacks a day.
OCCUPANCY COSTS
Building: Because MDCC worked in conjunction with the local school district and the
Aboriginal Head Start program prior to constructing the new facility, the building was purposely built larger than the space required by the day care only. Consequently, when it came time to
analyze costs, it was the board’s opinion that the Aboriginal Head Start and school district programs should share in the costs of the building.
Utilities: When MDCC designed the facility, it considered the needs of the tenants and designed their rooms accordingly. The board did not have the foresight, however, to setup the tenants’ rooms with their own gas, electric, and water meters. Therefore, all of the utilities are measured through common meters, and MDCC pays the bills for the entire facility. The only exception to this is the telephone expense, as each program contracts and pays for its own phone service. See Exhibit 4 for details.
Maintenance, etc.: As specified in the lease agreement, MDCC pays the entire building’s expenses related to maintenance, cleaning supplies, and sanitation. See Exhibit 4 for details.
INSURANCE COSTS
MDCC has four different insurance costs: property, general liability, officer’s bond, and
worker’s compensation. The property insurance covers the entire building. The general liability insurance covers the children and staff in the MDCC program and helps protect the center
against accidents or claims against the staff. The tenants must carry their own liability insurance. The bond insurance on the officers covers the center for any inappropriate handling of financial matters by the board of directors. Finally, the worker’s compensation insurance covers the administration and MDCC employees for work-related injuries.
OTHER OPERATING COSTS
A complete listing of the organization’s operating expenses is shown in Exhibit 2. The costs not previously discussed include administrative or program costs such as accounting, advertising, continuing education, and supplies. These costs are attributable solely to MDCC.
THE ACCOUNTANT’S CHALLENGE
Rather than addressing the revenue and cost issues that arose during the facility construction, the board took a “wait and see” position and opted to review both the childcare rates and rental rates after the new facility had begun operations. After the first year of building occupancy, the MDCC board wanted to evaluate the costs and revenues associated with each of the day care’s and tenants’ programs. The board hired CH to explain why the center is running at a loss. You indicate that you believe that both the childcare rates and rental rates were set without establishing correlation to the costs that they were intended to cover. You also state that you want to take the time to complete a thorough cost and profitability analysis of the day care’s childcare programs and tenant agreements. In order to do so, you decide to implement an activity-based costing system to allocate costs to the various programs and tenants.
Exhibits 2 and 3 provide revenue and expense information for the first year of operations at the
new facility. Exhibits 5-7 provide additional information useful for the cost analysis and decision making.
ACTIVITY-BASED COSTING—A QUICK REVIEW
Activity-based costing (ABC) is used frequently in manufacturing settings because it typically improves product cost information. ABC replaces arbitrary cost allocations by first assigning costs to activities and then to goods based on how much each good uses the activities. The concepts of ABC can also be applied to service-based organizations where tangible products do not exist. In a service organization, costs are assigned to the various activities performed, cost drivers that measure the activities performed are identified, cost driver rates are calculated for each activity, and the resulting rates are used to assign activity costs to the types of services provided. This process reflects the causal relationship between the activity, the costs created by the activity, and the assignment of these costs to services.
IDENTIFICATION OF COST DRIVERS
There are many activities present in a day care setting that create or drive costs. An example is
the preparing and serving of food. It is relatively easy to assign many of the costs, such as food
and direct labour, to this activity. It is more difficult, however, to assign costs to many of the
most significant activities that occur regularly in a day care. These activities (like reading a book, playing a game, or teaching a skill) are key components of the service being provided—
childcare— but they are difficult to measure. Therefore, identifying each of the individual
activities that drive cost and then assigning cost to the daycare programs based on those activities
maybe cost prohibitive. For that reason, MDCC places activities into broad category
classifications. When considering drivers that would be cost effective yet causally related to the costs being incurred, population or a population subset becomes the driver identified for many of the activity cost pools. Population maybe measured in terms of enrollment, class size, or number of staff. See Exhibit 7.
Mustafa Day Care Center
Required in hard copy during the class scheduled time no later than Monday, March 4th, 2024. Prepare a memo to the board of directors of MDCC to address the following issues/questions:
1. Identify the services or programs to be included in the cost and profitability analysis. (2 Marks)
2. Examine the costs listed in Exhibit 2.
a. Identify the direct costs associated with each service or program. (2 Marks)
b. Which costs would be organization-sustaining costs? Provide an argument for or against assigning these costs to services or programs. (2 Marks)
3. Identify the broad activity categories and create cost pools by assigning the costs from Exhibit 2 to the pools. (4 Marks)
4. Identify the cost drivers that have a causal relationship to the activity cost pools created in Issue/Question 3. (4 Marks)
5. Calculate the activity or cost-driver rates for each cost pool. Note: You should develop rates that will allocate costs to MDCC programs and/or tenants only. You should not
allocate any costs back to general administration. (4 Marks)
6. Using the services or programs identified in Issue/Question 1, determine service or
program revenues, assign the costs to the service or programs, and calculate service or program profitability. (6 Marks)
7. Based upon your calculations in Issues/Question 6, which services or programs are
operating successfully? What appears to be the determining factor in whether the service or program is profitable? (6 Marks)
8. Discuss at least four alternatives for improving the overall profitability of the daycare facility. (8 Marks)
9. Discuss and complete a detailed balance scorecard for MDCC (See Exhibit 8). Identify at least four objectives for each perspective. For each objective identify appropriate measures and targets consistent with MDCC’s mission. Provide a strategy map to visually present the causal relationships among the objectives of the balance scorecard.
(12 Marks)