Organisational Resources (COMM1170)

Suppose a charitable organisation called Food on Wheels provides meals for low-income individuals who are unable to leave their homes. To support its services, it solicits contributions from individuals and businesses. Food on Wheels needs to submit financial statements to its major sponsor. The sponsor requires expenses to be assigned to the following cost pools: administrative, fund-raising, and programs.

The bookkeeper for Food on Wheels is a volunteer who is taking accounting classes at the local community college. He knows that all of the costs to prepare and deliver meals should be assigned to the program. However, he is not sure how to assign some of the costs. In particular, he is concerned about the following two items.

Costs for printing and mailing a monthly newsletter

The newsletter is sent out to donors and clients and asks for donations. It also describes the organisation’s activities, provides information for obtaining meal services, and provides recipes for some of the meals that are served. The director of the organisation wants the cost of the news-letter to be classified as a program cost. She maintains that the program information and recipes should be considered educational material. Not-for-profit organisations typically classify educational materials as program expenses.

Director’s salary and benefits

The director of Food on Wheels spends much of her time raising funds, meeting with the board of directors, and performing other administrative duties. She also manages the cooks and drivers, purchases food and delivery supplies, and schedules the food deliveries. The director has instructed the bookkeeper to allocate her salary and benefit costs as follows: 50 per cent to the program, 25 per cent to fund-raising, and 25 per cent to administration.

Identify and discuss uncertainties about how each of the following costs should be classified: (in short paragraph)

1. Costs to print and mail the newsletter
2. Director’s salary and benefits

Suppose a charitable organisation called Food on Wheels provides meals for low-income individuals who are unable to leave their homes. To support its services, it solicits contributions from individuals and businesses. Food on Wheels needs to submit financial statements to its major sponsor. The sponsor requires expenses to be assigned to the following cost pools: administrative, fund-raising, and programs.

The bookkeeper for Food on Wheels is a volunteer who is taking accounting classes at the local community college. He knows that all of the costs to prepare and deliver meals should be assigned to the program. However, he is not sure how to assign some of the costs. In particular, he is concerned about the following two items.

Costs for printing and mailing a monthly newsletter

The newsletter is sent out to donors and clients and asks for donations. It also describes the organisation’s activities, provides information for obtaining meal services, and provides recipes for some of the meals that are served. The director of the organisation wants the cost of the news-letter to be classified as a program cost. She maintains that the program information and recipes should be considered educational material. Not-for-profit organisations typically classify educational materials as program expenses.

Director’s salary and benefits

The director of Food on Wheels spends much of her time raising funds, meeting with the board of directors, and performing other administrative duties. She also manages the cooks and drivers, purchases food and delivery supplies, and schedules the food deliveries. The director has instructed the bookkeeper to allocate her salary and benefit costs as follows: 50 per cent to the program, 25 per cent to fund-raising, and 25 per cent to administration.

Required

1. Identify and discuss uncertainties about how each of the following costs should be classified:
   1. Costs to print and mail the newsletter
   2. Director’s salary and benefits

2. Does this situation involve an ethical dilemma for the bookkeeper? Why?

3. Explain why the director has a preference for costs to be assigned to program expenses.

Direct, step-down, and reciprocal methods; assign costs to departments. Cost information for Lake County Library is as follows

In addition to directly traceable costs, the library incurred $24,000 for a building lease.

Required

1. Allocate to departments any costs that have not been traced, and then calculate total costs assigned to each department.
2. Allocate the support department costs to the operating departments using the direct method.
3. Allocate the support department costs to the operating departments using the step-down method. Allocate first the costs for the support department having the largest direct costs.
4. Allocate the support department costs to the operating departments using the reciprocal 

Jenny’s Jam produces a range of made-to-order, handcrafted jam. Jenny received an order from a customer for 20 jars of dragon fruit and basil jam. This customer order requires 1 hour of cooking time and 15 mins of bottling time. Each jar requires $5 direct materials and $2 of direct labour. The pre-determined indirect cost rate of Cooking is $5 per hour, and the predetermined indirect cost rate for Bottling is $20 per hour. What is the cost of this customer order?

Garrison Gardening Tools manufactures gardening tools including shovels, rakes and spades. One of Garrison Gardening Tools’ departments is Machining department, which carries out machining operations such as pressing and cutting. Which of the following is the most appropriate cost driver for the purpose of allocating Machining Department’s costs to a shovel?

A. Number of machining minutes used to make a shovel.

B. Number of employees in the Machining Department.

C. Sales revenue of shovels.

D. The floor space in the Machining Department.

E. The depreciation cost of the machines in the Machining Department. 

Whole Foods sells bulk organic foods. The table below shows what Whole Foods Ltd can earn in a good and bad year. The company has taken on a new loan worth $1m at a cost of 5%. The value of the unlevered is $ 4.55m and has a required rate of return on unlevered equity of 15%. The company is also subject to a 30% tax rate.

What is the required rate of return on levered equity for the firm after taking out the loan?

Good year
Revenue=2,000,000

Variable cost=500,000

Fixed cost=150,000

EBIT=1,350,000

Debt=1,000,000

Interest=50,000

Pre-tax=1,300,000

Tc=30%

Tax=390,000

Net income=910,000

Bad year
Revenue=1,000,000

Variable cost=250,000

Fixed cost=150,000

EBIT=600,000

Debt=1,000,000

Interest=50,000

Pre-tax=550,000

Tc=30%

Tax=165,000

Net income=385,000