Case Study: Appaloosa County Day Care Center, Inc.

Florida Memorial University

Bus 501 Accounting for Management

Fall 2011

Dr. Rosalie C. Hallbauer

Aldon Hemmans

Mary Saddler

Gerald Turner

• Identify the services or program to be included in the cost and profitability analysis.

The Department of Human Services licensing regulations of a staff to child ratio that all

licensed facilities must follow. If a center pays just the minimum wage at least $1.95 per hour

would need to be charged for each infant just cover the cost of the employee. In addition,

other costs that impact day care center operations include occupancy costs, food, insurance,

supplies and programming expenses. Occupancy and food costs are influenced by the

Department of Human Services. The facility must follow specific nutritional guidelines in

preparing meals and snacks. The board concluded that constructing a new facility would be

the best option for providing quality childcare in an attractive and safe environment. The

ACDC board spearheaded the construction of an 8,000 square foot building that would be

owned by ACDC and funded in part by a federal grant and a loan from the local USDA Rural

Development Office. The cost of food is included as part of the tuition fee. Also when it

came time to analyze costs, it was the board’s opinion that the Head Start and school district

programs should share in the costs of the loan and building. ACDC 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. ACDC has four different insurance costs: property,

general liability, officer’s bond and worker’s compensation. The costs not previously

discussed include administrative or program costs such as accounting, advertising, continuing

education and supplies. These costs are attributable solely to ACDC. Activity based costing is

used frequently in manufacturing settings because it typically improves product cost

information. 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 le 2assign activity costs to the

types of services provided.

• Examine the costs listed in Table 2

• Identify the direct costs associated with each service or program.

The financial accounting system provides the foundation for program costing. However, this

system probably precludes capturing all funding and cost at the program level. At the time

program costs are prepared, certain cost accounting procedures must be applied to the amounts

produced by the financial accounting system. These procedures are applied on a systematic basis

and are documented for audit trail purposes.

COSTS TO BE REPORTED

LABOR COST Pay-W $ 109,500 Pay-T $ 9,475

FOOD COST $ 5,500

OCCUPANCY COSTS Dep. $ 11,800 Int. E $13,085 Water $ 1,100

OCCUPANCY COSTS Util. $ 4,000 Mt. $ 5,950 San $ 2,435

OCCUPANCY COSTS Clean $ 365

INSURANCE COSTS B/P $ 860 Bond $ 120 G/L $2,190

INSURANCE COSTS W/C $ 400

OTHER OPERATING COST Acct $ 900 Adv. $ 150 CED $ 450

OTHER OPERATING COST Sup $ 2,900 Admin $ 35 Art $3,675

b) Which costs would be organization-sustaining costs? Accounting & Legal fees.

Provide and argument for or against assigning these costs to services or programs. Fees are

necessary Audits play an important role in ensuring the sound financial management of a

business. A review of appropriate financial records by an independent public accountant will

determine whether you have spent money according to your budget and have met any

requirements mandated by various funding sources as well as state and federal regulations. An

audit also provides you with an accurate financial statement and recommendations to improve

your financial management. Many funding sources require a financial statement or audit as a

condition of future grants or contracts. You should, therefore, budget for an audit or look for an

accountant who will do it for little or no charge.

3. Identify the broad activity categories and create cost pools by assigning the cost pools by

assigning the costs from table 2 to the pools.

Advertising- 150, Food expense- 5,500, Ins.- Workers comp 400, Payroll- wages- 109,500,

Telephone- 1,060, Utilities- 4,000

4. Identify the cost drivers that have a causal relationship to the activity cost pools created in

question 3.

Response:

Cost driver/Activity #1-Food preparation and serving

Activity Costs- food, cooking/eating utensils, energy costs (heating/cooling/food preservation/storage), Incidentals (napkins, cleaning supplies, water).

Cost driver/Activity #2- Building operation

Activity Costs- sanitation services/supplies, utilities, repairs & maintenance

Cost driver/Activity #3-Employee related expenses

Activity Costs- Payroll, paid breakfast/lunch/dinner

Cost driver/Activity #4- Child care and Interactive learning tools (program/art)

Activity Costs- Infant care, toddler care, pre-k care, food, program/art

Cost driver/Activity #5- Insurance & legal

Activity Costs- Property insurance, Officer bond insurance, General liability insurance, Workers comp insurance, accounting and legal fees, bank charges

5. Calculate the activity or cost-driver rates for each cost pool. Note: You should develop rates

that will allocate costs to ACDC programs and/or tenants only. You should not allocate any costs back to general administration.

Response:

Cost driver/Activity #1-Food preparation and serving- food ($5500) + cooking/eating utensils (unspecified) + Incidentals (napkins, paper towels, etc) (unspecified)=$5500 + Unspecified

Cost driver/Activity #2- Building operation- sanitation services/supplies ($2800) + utilities ($4000) + repairs & maintenance ($5950) = $12750

Cost driver/Activity #3-Employee related expenses- Payroll ($118,975) + paid breakfast/lunch/dinner (unspecified) = $118,975 + unspecified variables

Cost driver/Activity #4- Child care and Interactive learning tools (program/ art)- Infant care ($20,915) + toddler care ($41,830) + pre-k care ($31,510) + food (unspecified) + program/art ($3675) = $97,930 + unspecified

Cost driver/Activity #5- Insurance & legal- Property insurance ($860) + Officer bond insurance ($120) + General liability insurance ($2190) + Workers comp insurance ($400) + accounting and legal fees ($900) + bank charges ($35) = $4505

6. Using the services or program identified in Question 1, determine service or program revenues, assign the costs to the service or programs, and calculate service or program profitability. A spreadsheet may be helpful with this task.

178450 Revenue – 151001 Expense175886

Total Expense

                         

YEAR

TOTAL

  Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec PROJECTED

    213 427 641 854 1,068 1,282 1,495 1,709 1,923 2,136 2,350

Tuition                          

Infant Care 2,378 2,378 2,378 2,378 2,378 2,378 2,378 2,378 2,378 2,378 2,378 2,378

Toddler Care 5,726 5,726 5,726 5,726 5,726 5,726 5,726 5,726 5,726 5,726 5,726 5,726

Pre-K care 5,221 5,221 5,221 5,221 5,221 5,221 5,221 5,221 5,221 5,221 5,221 5,221

Rent 0                        

School District 350 350 350 350 350 350 350 350 350 350 350 350

Head Start 530 530 530 530 530 530 530 530 530 530 530 530

Square Foot 0                        

ACDC 300 300 300 300 300 300 300 300 300 300 300 300

School District 146 146 146 146 146 146 146 146 146 146 146 146

Head Start 221 221 221 221 221 221 221 221 221 221 221 221

Cash from other

sources                          

TOTAL CASH IN 14,871 14,871 14,871 14,871 14,871 14,871 14,871 14,871 14,871 14,871 14,871 14,871

                           

Cash OUT                          

Payroll 9,125 9,125 9,125 9,125 9,125 9,125 9,125 9,125 9,125 9,125 9,125 9,125

Payroll taxes 790 790 790 790 790 790 790 790 790 790 790 790

TOTAL STAFFING 9,915 9,915 9,915 9,915 9,915 9,915 9,915 9,915 9,915 9,915 9,915 9,915

Food 458 458 458 458 458 458 458 458 458 458 458 458

Transportation                          

Supplies 578 578 578 578 578 578 578 578 578 578 578 578 Utilities 508 508 508 508 508 508 508 508 508 508 508 508

Marketing 13 13 13 13 13 13 13 13 13 13 13 13

Ins: Bus./Lia.//Real

Est/Worker's Comp 298 298 298 298 298 298 298 298 298 298 298 298

Audit/Legal 75 75 75 75 75 75 75 75 75 75 75 75

Repairs/Maintenance 699 699 699 699 699 699 699 699 699 699 699 699

CEDU 38 38 38 38 38 38 38 38 38 38 38 38

Bank Charges 3 3 3 3 3 3 3 3 3 3 3 3

TOTAL OPERATING

DISBURSEMENTS 12,584 12,583 12,583 12,583 12,583 12,583 12,583 12,583 12,583 12,583 12,583 12,583

                           

Depreciation 983 983 983 983 983 983 983 983 983 983 983 983

Mortgage/Lease

payments 1,090 1,090 1,090 1,090 1,090 1,090 1,090 1,090 1,090 1,090 1,090 1,090

Loan payments                        

Payments on past

due obligations                        

Interest Expense                        

                           

TOTAL CASH OUT 14,658 14,657 14,657 14,657 14,657 14,657 14,657 14,657 14,657 14,657 14,657 14,657

                           

NET CASH FOR THE

PERIOD 213 214 214 214 214 214 214 214 214 214 214 214

                           ENDING CASH 213 427 641 854 1,068 1,282 1,495 1,709 1,923 2,136 2,350 2,564

7. Based upon your calculation in Question 6, which services or programs are operating successfully? What appears to be the determining factor in whether the service or program is profitable?

• Federally- funded Head start program

• Pre-School program

Since the early 80's daycare has become an almost standard social agency in local communities

either as part of the school system, the local church or as part of the duties provided for by the

Welfare services. Daycare specialists undergo training and must be licensed and qualified in the

positions and roles they are given. There are for-profit and non-profit daycare agencies spread

across America and the quality of childcare experience is dictated by budget, legislation and

access to grants and funds. For this purpose, I have decided to visit a local daycare center being

run by the Catholic Church. They are funded by private donors, the church and church members.

The children in the system are either kids of members of the church or children who come from

very poor and marginalized families whose parents have sought the help of the church for their

care while they work in the day. There are 2 sessions - one in the morning, one in the afternoon.

For special cases, as when a child needs to be left for a whole day, children are registered as 'full-

day' wards. Learning materials as well as food is provided. The daycare center is located in one

of the buildings within the church property.It will depend on the size of your program, the age

ranges you care for and other services you provide. As a rule, infant care is the most expensive.

This is not known as a business to get rich in. Many programs report not seeing a profit for the

first 6 months to a year. Even then average profit margins are only 10-15%. In establishing your

rates, it is best to learn what the going rates are for similar programs in your town. To apply

ABC, it is necessary to identify specific activities that are to be costed. These are referred to as

cost centers. Cost centers are a particular way in which the resources used to produce an

organization’s activities and the costs of those resources are grouped. Cost centers must be

defined in such a way that:

The sum of the cost centers is comprehensive hereby including all of the resources used to

produce each and every activity of the Program and together, the entire Program, and they must

be mutually exclusive thereby avoiding double counting any of the resources used to produce the

Program. It is important to note that the cost methodology is not comprehensive. It does not

include all of the costs incurred by Appaloosa County Day Care Center in implementing the

program. Rather, it focuses exclusively on the costs. Hence, some costs of the program for

instance, the costs incurred by community and families participating in the program are not

included.

8. Discuss at least there alternatives for improving the overall profitability of the daycare facility.

• An alternative for improving the overall profitability of the daycare facility is to stop

paying for employee meals. This would reduce the food expense of the company by up to

20% (the text stated that for every 4 infants, 1 adult/employee must be present).

• Another alternative for improving the overall profitability of the daycare facility is to

raise the lease rate charged to the head start program and the school district for rented

space/rooms. The text shows us that tenants typically pay for their own utilities,

maintenance, and sanitation, however ACDC is providing these services to these tenants.

As it stands, ACDC is undercharging the tenants and are not even covering their own

expenses. This change could raise profit margins exponentially.

• A final alternative for improving the overall profitability of the daycare facility is to

invest in adding meters to the rooms of the tenants to measure energy consumption. The

initial loss implied by adding meters will be recovered and translated into profit because

ACDC can now charge energy rates based on the actual energy consumption of each

room as opposed to measuring the levels through common meters. This in conjunction

with sharing the costs of the loan and building (i.e., interest expense and depreciation)

will produce more revenue.

• To cut operating expenses, you may be able to find volunteer aides through local

community youth employment programs. Volunteers can offer special activities that

centers could not otherwise afford to give children and their families. They can serve as

teachers, teacher aides, secretaries and bookkeepers. Many volunteers are skilled in story

telling, dance, art and music. Parents may have skills in nursing, accounting or law and

may want to serve as volunteers as a way to reduce tuition fees.

• Colleges and universities (student teachers, students in art, music, athletics).

• Fraternities and/or sororities.

• Girl Scouts and/or Boy Scouts.

• Junior League.

• Foster grandparent programs.

• Senior citizen groups.

• Armed forces bases.

• Training programs such as early childhood development classes.