The Blackbaud School Accounting and Reporting System - Case Study Example

CASE STUDY OF ICAA Student’s Name Subject Professor University/Institution Location Date Requirement 1 The primary objective of the case of MLC was to demonstrate that introduction of environmental management accounting in a firm achieves good financial and environmental outcomes. In order to achieve this objective the case study was divided into three phases with each having its own objectives as identified and explained below. Phase 1: The objectives of the case study under phase one were to review operations of MLC in order to identify the environmental factors related to the operations and identify management accounting systems used by MLC and the treatment of environmental impacts within the system, which includes accounting, capital expenditure, budgeting and reporting systems. This phase identified water usage, waste management, energy usage and paper usage as the main environmental impacts related to the MLC’s operations. Phase 2: The objectives of the case study under phase two is to identify costs and opportunities related to environmental impacts that were not identified and recorded within the system. This phase determined to provide MLC’s management and stakeholders with reliable information by determining the necessary changes in the system in order to make the impacts and related costs to be easily identified. Phase 3: The objective of the case study under phase three was to record the results discrepancies as consequences of systems changes incorporated in phase two. The results indicate that environmental management accounting is critical to good management and that management can obtain meaningful information for making decisions if management accounting systems account for environmental impacts. Requirement 2 The Blackbaud school accounting and reporting system that is in operation at MLC has functions for students’ registrations, records and accounting for not for profit making organizations. The system has limited outputs for management accounting reports and the main outputs include balance sheet, statement of income and in addition it has trial balance, charts of accounts and the general ledger. In order to produce statement of income and expenditure and cash flow forecast, MLC uses spreadsheets. MLC’s capital expenditure entails capital replacements and capital works. The decision to replace capital equipment is triggered by requests made by the teachers. Each department is required to have a priority for the needed replacement upon which the budget is made based on overall preference list. MLC prioritizes items of capital works and then subject them to public tendering in order to arrive at a proximate cost for the items. These are the costs that are incorporated into the budget. Requirement 3 The environmental impacts related to MLC’s operations include water usage, waste management, energy usage and paper usage. Costs related to paper water and energy are distributed to general administration overheads while the costs of environmental impacts associated with waste management are distributed to cleaning and caretaking overheads. Beyond this there is no more classification accorded to account for these costs. When costs associated with environmental impacts are incurred, they are directed to expenses account where they are arbitrarily allocated to tuition and boarding but not to responsibility centres. These expenses are then disclosed in the income and expenditure report as overheads. For the purposes of cost treatment MLC has two departments upon which costs of environmental impacts are allocated and apportioned and these are tuition and boarding. These are the cost centres in which the costs are allotted which are classified into administration and general overheads and cleaning and caretaking. Administration and general overheads include photocopying, light and power and water rates. Caretaking and cleaning includes waste management. The total of expenses in tuition and boarding represents the total expenses incurred and this is what is reported in the income and expenditure reports. The allocation approach adopted ignores the costs of service between general administration and caretaking and cleaning departments and allocates all costs to tuition and boarding in the ratio of the remaining percentages. After all allocations have been made all the costs are contained in the two operating departments. This is a major effect in that overhead rates can be affected if the resulting errors in allocation are significant. Requirement 4 The existing accounting system recognizes both the operating departments and services departments. The method of cost allocation used ignores the service between service departments, which makes it to be highly inaccurate. This leads to distorted product and service costs and to ineffective pricing. The service department costs should be allocated to both operating and service departments. If there are interdepartmental services, the process of cost distribution should be repeated until the amount in the service department is insignificant. After all allocations have been made all the costs are contained in the operating departments. These costs will form the bases for preparing overhead rates and for determining the overall profitability of operating departments in MLC. Knowledge of the expenses allocated to individual department will help the management in making informed decisions and not just generalize on the performance. Requirement 5 Activity based costing (ABC) is a tool for management accounting that allocates overheads based on the activities incurred during the production process (Horngren & Harrison, 2007). Therefore, the method will attach a cost to the activity that is responsible for the cost occurrence. ABC can be beneficial to MLC since the major activities performed by the organization can be identified and the actual cost consumed by each activity can be assessed with a high degree of accuracy. For instance, since the school has huge cost that is allocated to general administration overheads, ABC can be beneficial in allocating all the costs to general administration. ABC will allow MLC to make a determination of the actual cost related to each student without regard to the structure of the organization. This approach will enable MLC to define the organization’s activities in terms of value addition. The identification of value adding and non-value adding activities will help MLC to determine where time, money and effort are going into waste and resulting to incurring unnecessary costs. The school will allocate more of its resources to value-addition activities. Requirement 6 The costs associated with environmental impacts within MLC include water usage, waste management, energy usage and paper usage. Each of these costs requires a unique cost driver that will equitably share the common cost amongst cost centres. Water usage: the cost driver used for the allocation of water usage within MLC is the percentage of domestic water usage issued by Water Corp whereby the cost attached to each usage can be approximated and used as allocation base for water usage cost to responsibility centres. The use of percentages relating to washing machine and toilet but excluding outside watering usage is not appropriate since outside watering account for a high percentage of water usage hence by default should be a cost driver for water usage. Waste management: MLC does not recycle any other waste apart from paper. Therefore, this cost should be allocated based on the labour input in collecting waste papers, containers for collecting papers, handling equipment costs and the associated training. All these costs need to get allocation to responsibility centres. Using floor space as the cost driver is inappropriate since all costs are not captured; for instance containers for colleting the litters may not be accounted for. Energy usage: energy usage within MLC can be allocated on the basis of energy consumption to each responsibility centres. This is because some responsibility centres can be heavy energy users than others which means allocating this cost on the bases of energy consumption will correctly portray the energy usage cost. Using floor space as the cost driver has a limitation in that some responsibility centres can occupy space, but they save energy than the other. Paper usage: most of papers in MLC are used for photocopying hence the number of papers shredded should be the appropriate allocating bases for paper usage. Using the number of copies made for each department as a cost driver may not appropriately reflect the environmental impact since a particular department can be effective in preventing spoilage during photocopying. Requirement 7 At AMP many costs related to environmental impacts are hidden. They are often treated as rental charge which the company pays hence making it impossible to track and manage environmental impact cost. Maintaining records on both energy and water usage will help to charge the environmental impact cost to the right responsibility centre. Sufficient records will help to identify and allocate costs to the right responsibility centre. This will improve the cost accounting system of the company, which is the foundation of internal financial information system. This will help the management of the company in planning whereby they outline the steps to be taken in moving the company towards its objectives. The management will be concerned with what energy and water usage will be incurred in the future so that appropriate plans and decisions can be made in good time. The managers will study the accounting and other reports and compare these plans against the plans set earlier. These comparisons will show which responsibility centres are not cost effective since there is sound bases of information for financial control. Managers can make rational choices among the alternatives on energy saving and water utilisation. An important factor in making this choice is the financial implication of the various alternatives (Weygandt, et al., 2009). Correctly presented, cost information can be of great value to the management in decision making. Requirement 8 There are no adequate records at MLC to enable cost identification and cost allocation in relation to waste. There are a number of costs related to waste that have not been accounted for. This include waste management which entails costs relating to labour input, handling equipment, training and purchase of containers. The other cost that is not included relate to waste disposal which entails the costs of the disposed products. Including these costs to the responsibility centres will develop additional records for identification, allocation and managing the costs related to waste. Labour hours can be obtained by determining the time taken by workers on activities relating to waste management in relation to total time. Therefore, labour hours will be the appropriate allocation bases. The allocation for any expenses that is incurred for the purchase of container and handling equipment for waste management should go to waste. Any training that is related to waste management and handling should be assigned to waste. There is a cost attached to any product that is disposed of. These costs should attach to waste. ABC technique should be used to allocate these costs to the relevant responsibility centres. The resultant benefits from the implementation of wise waste management should be attributed to the responsibility centres that achieved the benefits. Requirement 9 LCC (Life Cycle Costing System) is an important tool for management accounting which focus on capturing product cost, service cost or the cost of the physical asset throughout its life span (Hall, 2004). LCC would include all costs incurred since the design stage to when the product is disposed hence ruling out the possibility of not accounting for any associated cost. MLC could implement LCC during capital budgeting decisions to ensure that costs relating to the investment are considered, which includes cost of acquisition, cost of financing operational costs, maintenance costs and costs of disposal. This improves decision making process as it is an entire and inclusive approach hence making investment decisions from an informed position. In this case a capital expenditure decision would be taken only if the entire project is considered to be cost effective. Therefore, an investment project that has least cost of acquisition but high operational costs would be declined. This is because the maintenance, operational and disposal of capital assets can involve huge environmental impact costs and other financial costs as well. Incorporating these costs in LCC enables the costs and environmental impact issues like energy consumption and efficiency, maintenance requirements and disposal to be considered. This improves decisions on environmental impact costs for acquiring capital investments. References Hall, J. A., 2004. Accounting Information Systems, 4th ed. Ohio: South-Western Publishing Co. Horngren, C. T., & Harrison, W. T., 2007. Accounting.7th ed. Upper Saddle River, NJ: Pearson Prentice Hall. Weygandt, J. et al., 2009. Managerial Accounting: Tools for Business Decision Making. New York: John Wiley and Sons. Read More