Methodist Ladies College Reporting System - Assignment Example

Methodist Ladies College Case Study Methodist Ladies College, Perth (MLC) case study is based on environmental management accounting practices and intends to demonstrate how these practices can lead to favourable environmental and financial outcomes. MLC teaches kindergarten to year 12 students and is a daycare boarding school. The case study addresses several objectives and it has done so by way of organizing the tasks into three systematic phases. Three phases of the case study and their associated objectives Phase I was to check environmental impacts vis-à-vis MLC's operations and how these impacts are treated within the management accounting system currently in practice at MLC. The first step in this direction was to shortlist key environmental impacts and these included waste management; paper, water, and energy usage. While identifying these key environmental impacts, low levels of responsibility were accounting for overhead costs lost because of the existing accounting system. The system was lacking in terms of analysis or classification. Clearly, the existing system could neither identify revenue opportunities nor could it identify costs incurred on overheads; which led both of them to be not recorded anywhere. Phase II took up the tasks of identifying both revenue opportunities and cost incurred. It further ascertained as to what changes would be required to be made in the existing system in order to reflect these two parameters, with an intention to improve profits and reach environmental outcomes that were better than the previous ones. This was done for the environmental management accounting (EMA) to meet its desired objective of identifying these two parameters, and make them accountable in a way that the stakeholders can be fed with correct information. The focus of MLC's EMA were primarily transactions related to income, expenditure, and capital works and the system changes that were proposed to meet these objective included creation of activity sub-centers and responsibility centers, incorporation of record keeping methods, and drivers for apportioning costs to responsibility centers, amendment in the income and expenditure report formats to suit the changing needs, and inclusion of life cycle costing (LCC) to streamline decision making process. Following these changes in the system, Phase III was initiated for trial to check how the changes made impacted the whole system and what were the perceivable difference in the results achieved, which indicated how EMA was an effective contributor towards proper management, better accountability towards stakeholders, and a deterrent towards sub-optimal decisions that were previously taken. This is because the changes led to the availability of correct information and identification of opportunities that was not the case previously. MLC’s Blackbaud school accounting and reporting system Blackbaud is known for its services and software that it provides particularly to non-profits. The company claims it nurtures school data so that schools can nurture students. The idea is to give school staff and support convenient access and retrieval facility on student data whenever they need it (Blackbaud.com, n.d.). MLC uses this system for registration of students, their admissions and general records, and accounting related to non-profit organisations. Thus at MLC, it is primarily meant for reporting and accounting. But it has limited output with regard to management accounting reports since balance sheets, general ledger, income statements, chart of accounts and trial balance that it provides as an output have to be processed further manually to provide cash flow forecasts and income and expenditure spreadsheets. Similarly in case of capital expenditure, which has two arms of capital replacements and capital works, no periodic reporting is done in case of the latter, and decisions vest on teacher requests in case of the former. Apparently, the system lacks an appropriate methodology and there are no scientifically pre-set procedures for managing decisions. Environmental impacts of MLC’s operations and treatment of costs The school understood the need to be environmentally aware and active, and it prompted it to take up Swan River rehabilitation programme; and initiative that was supported by P & F (Parents and Friends) of the school by volunteering to work as "busy bees". This has helped the school to upkeep the riverbank by way of maintaining gardens and planting programmes. Costs pertaining to this programme flow through the existing accounting system haphazardly. For example, 'caretaking and cleaning' overheads incorporate costs incurred on waste management, and 'administration and general' overheads are used to identify costs associated with water, paper and energy usage. There is no methodological system to bracket these costs in suitable categories, which makes the system highly unaccountable and susceptible to wrong classifications and interpretations. The existing system codes costs directly to the expense accounts and there is an arbitrary allocation of costs between boarding and tuition while the sub-centre allocation is missing. This leads to the disclosure of income and expenditure details under overheads. For example waste management cost of $16,041 in the income and expenditure report for the year ended December 2001 is shown under caretaking and cleaning overhead, communicating nothing but a misnomer. The waste management cost of $ 7,918 is further put under boarding overhead. With regard to environmental impacts MLC, as enumerated above, incurs costs on energy, water, and paper usage, and waste management. Limitations of the existing accounting system An effective accounting system must have profoundly positive impact on a business, an individual, and stakeholders in an establishment or a non-profit organisation. The salient features of an effective system include being organised, optimised for effective use, and utility-based applicability (Stanley, n.d.) Systems that involve a lot of guesswork and manual input are prone to error, which subsequently lead to ill-informed management decisions. However the nature and size of an establishment may be, an effective accounting system goes a long way in making the processes better. As explained above the environmental costs at MLC are diluted in overheads, which leaves no room for improvements a the information provided by the system does not lead to correct estimation of either opportunities or costs and expenditures. There is a clear lack of classification because of which output that the system provides does not give any worthwhile leads towards identification of opportunities. Advantages of activity based costing at MLC As can be seen in Phase III, the case study recommends activity based costing (ABC) so as to achieve environmental and financial benefits at MLC. This is supposed to provide stakeholders with information that is meaningful. This is because ABC helps in allocating costs correctly based on the underlying understanding of the same beforehand. ABC has an advantage over standard costing techniques since it provides realistic basis for apportioning overhead costs. Standard costing techniques, on the other hand, use a very flawed method of allocating costs directly to either activities or products (McChlery, McKendrick, & Rolfe, 2007). ABC offers a strategic method at accurate determination of costs, and even if it is a recent inclusion to the cost accounting methods, it popularity has been rapid and all types of organisations have started showing great acceptance for it. The ABC works on a simplistic three-step process of identifying resource costs and activities, assigning these costs to activities, and finally costs pertaining to activities to cost objects (Tardivo & Cordero Di Montezemolo, 2009). ABC is ideally suited as a management accounting tool for MLC because 27.1 percent of the school's total expenditure falls within the administrative and general overheads. Allocation of environmental impact cost at MLC and limitations thereby The first step towards cost allocation at MLC would be to identify key environmental drivers for the same. The case study identifies a cost driver for each environmental impact, which makes the allocation possible and viable, even though there are limitations in such a methodology. Before understanding the limitations, the cost driver has to be understood correctly. For example light and power would be a cost driver and it would be assessed on the basis of floor space in square meters that it occupies of the total school floor area. Similarly, photocopying is another cost driver and it would be determined as percentage of total copies made through all the departments of the school where photocopiers are installed. Similarly water and waste management has to be assessed keeping in view the parameters as adjusted by Australian Water Corporation and allied agencies. Now, if the limitation is, for example, assessed on the light and power as the cost driver, it can be seen there will be a corresponding reduction in power supply to a responsibility center if a reduction is perceived in the main center because the allocation is based on the per square meter area through the campus. The schools location and scattered student population in its different parts has significantly differing activity impact in these locations. This leads to non-uniformity in resource usage within or around these areas. Varying usages, thus, cannot be expected to yield uniform results. Even though attempts have been made by the case study to select a cost drive , it cannot be denied that it is not so easy to select a perfect one in ABC, which makes it slightly difficult to identify overall costs (Maher & Marais1998). Benefits to the responsibility centers from maintaining records The responsibility centers at MLC have a greater role to play in terms of making EMA a fruitful incorporation. The responsibility centers which will be classified according to the subject area would be pivotal in identification of costs in an effective manner; keeping in view that costs can further be allocated to sub-centers for any specific activity. That means for any particular activity the relevant sub-center would be responsible for its maintenance. This would lead to a clear understanding of all costs incurred, their respective breakups and thus their subsequent aftermath in informed decision making. At the moment, given its current system, it is difficult for MLC to expect such viable results; complicating its cot allocation to sub-centers. It should be born in mind that responsibility centers would not act a profit-making venues, but they would help streamline the cost-expenditure part of MLC. Complete awareness of costs incurred or expenditures made will make responsibility centers as important units that would help MLC increase, reduce or importantly control costs based on a scientific understanding of the same. What is being currently shown in general and administrative overheads would be reflected in the actual overhead in which these costs have been incurred. When responsibility centers shoulder such an exercise they would, in reality, be keeping up with what environmental management accounting system envision for; identify, collect, estimate, analyse, report and use energy and materials such that the same provides a uniform flow of environmental and general information that can aid in informed decision-making in an organization (Bennett M, Bouma & Wolters, 2002). Developing additional records at MLC The case study identifies other revenue and cost saving opportunities at MLC which, if incorporated into its practices and systems, would impact MLC positively. But, in order to harness this aspect of the organisation, it would need integration of additional record maintenance into its accounting system. For example, MLC groups paper cost into "photocopying" expense. While as the truth is that it is not photocopying cost which as much as cost of procuring plain paper. This is because it is used for a majority of purposes, namely pads, letterheads, envelopes, invoices, student printing and newsletters. When all these head are indentified individually, considerable understanding can be had on the extent of usage and scope for minimising the same wherever possible. When that is done the corresponding usage of other related things as toner, photocopying, postage, and maintenance would get reduced by default. Individual breakup and identification of each overhead is essential because when collective cost and expenditure is calculated, certain smaller overheads, which in fact grow with frequent use, get ignored. For example, in photocopying overhead, the overall expenditure is calculated on cost payable to the photocopier suppliers, rental of the machines, and paper used. What the costing says does not include costs incurred on paper storage, energy costs on photocopying and cost of labour. In order to be able to capture this finer information, it becomes imperative to keep record of additional activities that go side-by-side of any current activity widely used. For example, additional records of time spent by people on photocopying, cost amount of energy used on the same, and specificity of the type of document photocopied would have to be maintained. The latter would help ascertain whether or not the copy made was actually mandatory or could have been avoided. Life costing system at MLC Life costing system is an assessment of documenting all costs that are incurred in whatever manner over the life cycle of an asset (Flanagan and Jewell, 2005). Popularly known as "cradle to grave" costs, it helps organisations capture minutest of data related to a service, product or an asset. At MLC if LCC is incorporated, it would make sure that decisions taken here have been taken only after a comparable and thorough appraisal of costs incurred on a service. LCC is normally done on a true calculation-based method keeping long-term usability of a product or service in mind. For example, LCC would prevent any decision from taking place which suggests a product based on its low cost but higher operability cost. Environmentally, LCC is going to offset many costs at MLC. For example, in the past two years it took up two capital works projects on air conditioners, the installation of which went up to a whopping $488,449. When this was done, LCC had not been used, and so MLC had no idea on ongoing and additional costs incurred on the same. But prior to disposal of these air conditioners, it was a startling revelation that total cost of all air conditioners at which they were disposed was more than twice the tendered cost at which they had been procured. This cost overdrive is reflected in Woodward's (1997) opinion who says that a product’s life cycle costs can be its multiplication of the investment or purchase value. References Blackbaud.com (n.d.). K 12 School Management Solutions. Available https://www.blackbaud.com/k-12/independent-school-management.aspx. Accessed June 07, 2012 Bennett M. Bouma J. J. & Wolters, T. eds (2002). Environmental Management Accounting: Informational and Institutional Developments. Selected papers from EMAN-Europe conferences, 1999 and 2000. Dordrecht, Netherlands: Kluwer Academic Publishers. Flanagan, R. & Jewell, C. (2005), Whole Life Appraisal for construction. Oxford: Blackwall Publishing Ltd. McChlery, S., McKendrick, J., & Rolfe, T. (2007). Activity-based management systems in higher education. Public Money & Management, 27(5), 315-322. Maher, M.W. & Marais, M.L. (1998). A field Study on the Limitations of Activity-Based Costing When Resources Are Provided on a Joint and Indivisible Basis. Journal of Accounting Research, Vol 36 No 1. Stanley, D. (n.d.). Characteristics of an Effective Accounting System. Available http://www.ehow.com/info_8071618_characteristics-effective-accounting-system.html. Accessed June 07, 2012 Tardivo, G. & Cordero Di Montezemolo, G., (2009). Using activity-based management to achieve excellence. Financial Management & Analysis, 22(1), 67-84. Woodward, D., (1997), “Life cycle costing – theory, information acquisition and application”, International Journal of Project Management, Vol. 15, No. 6, pp. 335-344. Read More