need help with extended family, inc case study

here isthe details of the assignment

http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?sid=c3e33403-c3d5-4789-b479-54d25addf53d%40sessionmgr110&vid=2&hid=128

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ISSUES IN ACCOUNTING EDUCATION
Vol. 23, No. 1
February 200

8

pp. 129–14

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Developing an Operating Budget for
Extended Family, Inc.: A Not-for-Profit

Human Service Organization
Karyl A. Mammano and Thomas N. Tyson

ABSTRACT: In this case, you will develop an operating budget for Extended Family,
Inc., a not-for-profit (NFP) human service organization. Completing this budget suc-
cessfully requires a high level of decision making, as you must determine the number
of cost pools and allocation bases upon which common costs are to be allocated
to the organization’s three revenue-generating programs. This case will expose you to
many real-world issues that NFP financial managers confront when they prepare op-
erating budgets. These issues include: (1) allocating revenue among programs; (2) dis-
tinguishing among program, administrative, and fundraising costs; (3) properly treating
temporarily restricted contributions; and (4) facing an array of ongoing financial chal-
lenges connected with NFPs.

INTRODUCTION

E
xtended Family, Inc., a community-based, not-for-profit (NFP) organization, was
founded in 1995 by a group of parents who were concerned about the stigma sur-
rounding children with disabilities. Specifically, these parents found that such chil-

dren did not have a place to go to receive specialized counseling aimed at helping them
cope with their disabilities. The founding parents also wanted their adult children with
disabilities to have an independent, yet supervised, living situation. Originally a grass roots
organization with limited support, Extended Family was incorporated in 1999 in order to
expand the program from advocating for services to providing services. Extended Family’s
mission is to educate the community on disabilities and to provide a safe living environment
that will enable people with disabilities to live with dignity.

Program Description
Extended Family operates three separate programs: counseling, education, and residen-

tial. Clients may be referred to one of these programs by their schools, social service
agencies, physicians, or their parents.

Counseling Program
The counseling program provides individual, group, and family counseling sessions.

The sessions are individualized and range from coping with a disability to training in
activities of daily living, such as using public transportation.

Karyl A. Mammano is an Assistant Professor and Thomas N. Tyson is a Professor, both at
St. John Fisher College.

The authors are very willing to share the sample solution and other data associated with the case.

Editor’s Note: This manuscript was accepted by Editor Kent St. Pierre.

130 Mammano and Tyson

Issues in Accounting Education, February 2008

FIGURE 1
Organization Chart

Office Assistant

Counselor
4.0 FTE

Director of
Counseling

Educator
.50 F TE

Director of
Education

Residential Support
5.60 FTE

Residence Manager
South House

1.0 FTE

Residential Support
5.60 FTE

Residence Manager
North House

1.0 FTE

Director of
Residence

Accountant Receptionist

Director of
Administration

Executive Director

1.0 FTE
1.0 FTE

Board of Directors

Extended Family, Inc.

Current Year Staffing

1.0 FTE1.0 FTE1.0 FTE1.0 FTE

1.0 FTE 1.0 FTE

Education Program
The education program provides education regarding disabilities to students in the area

school systems or teachers and other school personnel, such as cafeteria workers and teacher
aides. Additionally, educators participate in community health fairs, hand out information,
and answer referral calls at Extended Family.

Residential Program
The residential program consists of two group homes with 24-hour care and individual

units for residents. In order to qualify for admission, residents must be ambulatory and not
require skilled nursing care. The group homes teach the residents life skills, such as grocery
shopping, so that they can live independently. Length of stay varies according to an indi-
vidual’s physical capabilities.

Organization Chart
The organization chart of Extended Family, Inc. is presented in Figure 1. It displays

the following paid positions that are described below.

Developing an Operating Budget for Extended Family, Inc. 131

Issues in Accounting Education, February 2008

Position Descriptions

Executive Director: Reports to the Board of Directors and oversees agency operations.
Office Assistant: Types reports, arranges conferences and meetings, and acts as the

agency’s purchasing agent.
Director of Counseling: Directs all intake activities and determines whether a person

is eligible to receive counseling services, identifies the proper services, and super-
vises counselors.
● Counselor: Provides individual, group, and family counseling according to

each client’s individual treatment plan.
Director of Education: Performs outreach service to area schools and offers disability

education to students, faculty, and other interested parties. Develops curriculum for
the education program in the agency and community, and supervises a part-time,
in-house educator.
● Educator: Answers information and referral calls received at the agency; pro-

vides school and community education as needed.
Director of Residence: Oversees the residential program, including quality assurance.

Evaluates potential residents for admission and supervises residence managers.
● Residence Manager: Oversees the daily activities of the residence and super-

vises the residential support staff; ensures 24-hour coverage, and monitors in-
dividual treatment plans.

● Residential Support: Provides direct care to residents, aids them with daily life
skills according to their individual treatment plan; ensures that medical, coun-
seling, and work schedules are accurately maintained.

Director of Administration: Oversees finance, human resources, information systems,
and grant funding; supervises an accountant and receptionist.
● Accountant: Performs accounts payable, payroll, general ledger functions; pre-

pares grant vouchers for submission; prepares monthly financial statements for
board meetings; provides network support for administration.

● Receptionist: Answers all telephone calls, schedules clients’ appointments, and
provides typing support as needed.

Current Salary and Benefits
Position Current Salary (in $s) Additional Information

Executive Director 75,000
Director of Administration 45,000
Director of Counseling 36,000
Director of Education 32,000
Director of Residence 30,000
Residence Manager 22,000
Counselor 28,000 Per full-time position
Educator 22,000 Per full-time position
Residential Support 9.00 Per hour
Accountant 28,000
Office Assistant 12.00 Per hour
Receptionist 8.00 Per hour

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Other Expenses
Expense Amount (in $s) Additional Information

Rent, houses 1,000 Per month for both houses
Rent, office 2,500 Per month includes utilities
Insurance, Vehicle 1,500 Per year, both vans
Insurance, General Liability 10,000 Per year
Insurance, Board 2,500 Per year
Travel and conferences 400 Per employee
Cleaning, office 1,000 Per year
Office Supplies 13,300 Total from previous year
Depreciation 1,000 Per month
Bank Fees 350 Total from previous year
Meals, board / staff parties 900 Total from previous year
Lease, Copier 190 Per month
Lease, Postage Machine 90 Per month
Lease, Van—North House 400 Per month
Lease, Van—South House 350 Per month
Utilities, houses 275 Per month for both houses
Payroll Service Charge 1,500 Total from previous year
Education, Literature 2,500 Total from previous year
Postage 2,000 Total from previous year
Recreation 750 Per house
Audit Fees 5,000 Per year
Telephone, office 4,000 Total from previous year
Telephone, client 25 Per month per client:

residential clients only
Program Supplies, group 350 Total from previous year
Program Supplies, North House 4,500 Total from previous year
Program Supplies, South House 3,000 Total from previous year
Maintenance, North House 1,300 Total from previous year
Maintenance, South House 1,500 Total from previous year

The employees at Extended Family are aware that revenues and expenses must be
accurately allocated to individual program cost centers as well as to the administration cost
center. Each quarter the Director of Administration must send financial reports to the agen-
cies that provide funding. Reports sent to the state agencies for the counseling and resi-
dential programs determine rates of reimbursement that Extended Family will receive in
future years. Financial reports sent for the education program are accompanied by narrative
program reports regarding the services provided during the reporting period. These reports
are used by the funders to determine the continuation and amount of funding to Extended
Family and are made available to contributors. Contributors are concerned how expenses
are allocated between programs, and they expect to see total administration expenses fall
well below program expenses, so that the majority of funds—in particular, their contribu-
tions—are provided for services.

Developing an Operating Budget for Extended Family, Inc. 13

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Issues in Accounting Education, February 2008

Additional information
1. The Executive Director plans a 5 percent salary increase for all current staff in the

upcoming year’s proposed budget. Benefits cost 18 percent of salaries, and that per-
centage is expected to continue going forward. The normal workweek is 40 hours for
all full-time employees. Currently, the agency budgets salary expense equal to 6.00
full-time equivalent (FTE) employees per house for residential support.

2. Other operating expenses for the upcoming year will not increase. Travel and confer-
ences and supplies are the only expenses that can be reduced if the proposed budget
cannot support a continuation of the same amount. If possible, the Executive Director
would like to add an employee development day at a cost of $1,500 for a trainer and
food.

3. Expenses are allocated directly to the individual programs wherever possible. Office
supplies, telephone, and the copier lease are allocated based on the number of staff
members in each department. Also, rent and cleaning are allocated on the amount
of space occupied by each department. The Education program occupies 25 percent of
the building, Counseling occupies 45 percent of the building, and Administration and
common areas comprise the balance.

Revenue Sources and Units of Service
There is no anticipated increase in revenue for the upcoming year. Rates for counseling

services and residences are determined by the state and are not negotiable. Also, education
program grants are in the second year of a three-year contract. Program expansion is limited
as indicated below, and interest income on agency cash is expected to continue at $500.

Counseling Program
The counseling program rates are:

● Intake:1 $150.00 per visit per person
● Individual: $75.00 per visit per person
● Family: $

80.

00 per visit per family
● Group: $45.00 per visit per person

The Director of Counseling completes an average of 20 intakes per year. Extended
Family can bill for an intake visit even if the person is not admitted to the program. All
revenue for intakes is considered collectible.

Each counselor can provide individual services to five persons per day, one family visit
per month for each family unit, and one support group per week. Each support group has
five people in attendance. Also, counselor revenue is 95 percent collectible. Currently, four
counselors serve 100 individuals and 100 family units.

Education Program
The education program is funded through the following grants:

● County: $40,000
● United Way: $6,000
● Pharmaceutical: $3,000

The grants provide comprehensive program support for all necessary service-related
expenses.

1 Intake refers to the initial screening for eligibility into the program.

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Issues in Accounting Education, February 2008

Residential Program
The residential program rates are:

● South House, 6 residents: $60 per day per resident
● North House, 8 residents: $85 per day per resident

The state pays Extended Family for residents daily as long as the resident spends the night
in the house. The residents are away from the house an average of 14 nights per year. Rates
are determined through the submission of quarterly interim reports and a comprehensive
year-end cost report. Extended Family will not be eligible for increased rates of reimburse-
ment for the upcoming year. The non-eligibility is due to a prior-year special-rate adjust-
ment that enabled the organization to receive increased funding for making non-capitalized
purchases and repairs, so residences would meet new regulatory safety codes.

Agency Fundraising—Expansion
The Board of Directors has proposed creating a Public Relations and Development

position for the agency in the upcoming budget because the state rates of reimbursement
will not increase. In the past, the Executive Director has mailed an annual appeal letter to
the family members of individuals who receive services. In this letter, the Executive Director
includes a contribution form that allows donors to designate programs for their contribu-
tions. Historically, Extended Family has received about $5,500 per year in temporarily
restricted contributions. At present, $2,500 remains temporarily restricted as follows:

● $500 for a picnic for individual residents and family members for the counseling
program;

● $1,000 for a community-wide disability conference for the education program;
● $200 in a clothing fund to be used either by the counseling or residential staff for

individuals in need; and
● $800 for a camping trip for residents in the residential program.

All temporarily restricted funds, with the exception of the community disability con-
ference, are expected to be spent in the upcoming year and should be included in the
proposed budget.

The primary responsibilities of the new Public Relations and Development position are:

● Generating a quarterly newsletter
● Creating special events that would be held yearly
● Starting an annual appeal for contributions from community members using a mail

solicitation.

In the upcoming year, the annual appeal and one special event, a walk-a-thon, are
expected to take place. The Board of Directors understands the effort it takes to coordinate
and carry out special events; therefore, they expect that the person in the new position will
develop two more fundraising events after a year of service at Extended Family.

The following data represents an estimate of potential revenue and costs generated by
the new position. A new office will occupy approximately 2 percent out of the 30 percent
administration space and should receive an allocation of other anticipated expenses. In
addition, the income generated by the individual should fully support the position and offset
some of the deficits the agency now experiences.

Developing an Operating Budget for Extended Family, Inc. 13

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Issues in Accounting Education, February 2008

Revenue
Annual Appeal $16,000
Special Event:

Walk-a-thon Revenue 55,000
Walk-a-thon Expense (8,000)

Net Surplus $47,000

Expenses
Salary: $40,000
Benefits: 18 percent of salary
Newsletter: $2,500 per newsletter per quarter
Annual Appeal Letter: $1,000 for printing
Office Supplies: $500 in addition to the budgeted amount allocated
Postage: $1,500 per year

Additional Budget Concerns
Counseling Program

A recent survey by an agency that regulates Extended Family reports a great need in
the community for additional group counseling services for individuals with disabilities.
Specifically, the survey notes that at least 400 individuals in the community are underserved.
Extended Family has also had an increase in referrals for group counseling from other
agencies within the community that only provide counseling to individuals. Extended Fam-
ily wants to maximize its billing and perhaps add an additional counselor to its staff. At
present, only three group counseling sessions are conducted each night. However, there is
enough space to hire two full-time counselors to provide all services and two part-time
counselors responsible only for groups. If the full-time counselors are hired, then the intakes
would take place in January and staff would start in February; additional family visits would
be equal to the number of new individuals. Also, part-time group counselors could be hired
and begin services in January.

Full-time counseling staff is entitled to four weeks of vacation, 12 sick days, and eight
paid holidays per year. Newly hired full-time counselors will be entitled to the same amount
of vacation, sick, and holiday time. Part-time counselors, meanwhile, receive only the eight
paid holidays. While new full-time counselors will be paid the same salary as current
counselors, part-time counselor salaries will be a proration of the current full-time salary.

All individuals are assigned to a permanent counselor when they enter the program
and will only see another counselor in urgent situations. Vacations and sick days are not
considered billable days for individual visits. Family visits would be scheduled around the
counselor’s time off, and another counselor would provide services for the group. It can be
assumed that counseling staff will use the maximum time off allowed when preparing the
yearly budget.

Education Program
Extended Family has been asked to make presentations to employers who have em-

ployees with disabilities. The Director of Education believes this request can be accom-
plished with an additional quarter-time employee at a prorated salary of the current full-
time rate. In addition to employee and related expenses, $2,000 would be needed for
curriculum development costs and $1,000 for advertising. The education staff has not de-
termined the billing rate for this service. However, this additional revenue should be in-
cluded in the proposed budget.

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Issues in Accounting Education, February 2008

Residential Program
Three residents, one from South House and two from North House, will move during

the upcoming year, and the vacancies will be filled after a two-week period when the units
are cleaned and painted. New regulations require two people to be on-site 24 hours per
day, instead of the current one-person-per-house staff level. Consequently, two additional
residential support staff members must be hired to cover vacations, sick days, and holidays.
Residential staff members receive two weeks of vacation, 12 sick days, and eight holi-
days. The Residence Manager can provide additional coverage for the day shift, but the
Director of Residence can be used only for coverage on an emergency basis. The new staff
person will be paid $8.00 per hour along with benefits equal to the organization rate of 18
percent.

Fundraising Concerns
The executive and program directors have decided to run a two-week residential sum-

mer camp program for 13-year-old and younger individuals served by the organization. The
Board of Directors has agreed, as long as (1) all of the funds can be raised from the
community and (2) there will be no out-of-pocket costs to family members. Based on similar
camp programs, Extended Family needs to raise approximately $25,000. A preliminary
review of potential grants and phone contacts with local companies indicates that it is
possible to raise at least $15,000 in the upcoming year. The new Public Relations and
Development individual will actively solicit the $15,000 but hold the money until the fol-
lowing year when the camp is held.

Maintaining the long-term viability of the organization is a major concern of the Board
of Directors. Board members have begun a campaign to establish a permanent endowment
and use a portion of interest income for operating expenses. To kick off the campaign, the
grandmother of one resident has pledged $100,000 that would be received in two install-
ments in the upcoming proposed budget year.

CASE REQUIREMENTS
1. Using the partially completed spreadsheet in Exhibit 1 and information presented in

the case, complete the current consolidated operating budget of revenues and expenses
for Extended Family, Inc. Distribute the figures to Administration as well as to each
of the three existing programs (Counseling, Education, and Residential).

2. Using your output (the completed current operating budget) from Question 1, create a
proposed consolidated operating budget of revenues and expenses for Extended Family,
Inc. Distribute the figures to Administration, Fundraising, and each of the three existing
programs (Counseling, Education, and Residential).

3. Allocate Administration expenses in the proposed budget to the three programs and
Fundraising, and explain the rationale for the allocation procedure you used. Describe
at least one other method you considered for the allocation and discuss the effects of
this method on the budget for individual programs.

4. Prepare a brief written budget summary to the Board of Directors. In the summary,
discuss the assumptions you made when preparing the budget numbers. Include specific
comments and documentation regarding the effects the agency expansion and the pro-
grammatic concerns have on the proposed budget.

5. The Board of Directors does not want to depend solely on fundraising endeavors to
close the budget deficit, and has asked management to examine the organization’s
operating efficiency and other opportunities for additional revenue. Using the proposed

Developing an Operating Budget for Extended Family, Inc. 13

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Issues in Accounting Education, February 2008

budget, identify the strategies Extended Family should consider to remain viable. In-
clude narrative and numerical support for your suggestions. The following questions
may possibly be considered:
● Should current programs be expanded or closed?
● Should Extended Family consider alternate cost drivers to allocate costs? If so,

prepare a revision to the budget completed in questions two and three above, with
justification for the new allocations.

● Should the Board of Directors consider an endowment campaign at this time, or
should they consider a major campaign and establish a long-term flexible invest-
ment plan?

● Should Extended Family provide counseling or group services in an off-site loca-
tion? If so, prepare a supplemental departmental budget with the anticipated rev-
enue and estimated expenses, and provide a comparison to the proposed department
budget from question two above. The average rental property in the area costs $20/
square foot, including all utilities.

● What are some other alternatives Extended Family could consider for its counseling
department?

● Should the organization consider adding a for-profit endeavor, such as selling its
educational material? If they add a for-profit endeavor, then what is the additional
tax-reporting requirement? Where would Extended Family market its material?
Should Extended Family hire additional employees for this endeavor, and, if so,
what would be their responsibilities?

● To provide more residential service, should the organization add more residences
or relocate to larger buildings? Currently, the reimbursement rate for 12 individuals
averages $100 per day. Preliminary information indicates the following: rent and
utilities would increase 5 percent for the larger residence, client telephone amount
would decrease, residential maintenance would decrease to $2,500, and all other
expenses would remain the same. If Extended Family should add residences, then
prepare a supplemental departmental budget with the anticipated revenue and es-
timated expenses. Also, provide a comparison to the proposed department budget
from question 2 above.

6. Using the proposed operating budget, prepare a pro forma consolidated statement
of activities and a pro forma consolidated statement of functional expenses. Include
the totals from the current budget as comparative totals for the previous year. On the
statement of activities, the previous year’s net assets for the beginning of the year were
$60,000.

7. A member of the Board of Directors is concerned about the continuing deficit in the
residential program and has subsequently asked the Director of Administration to com-
plete an extensive analysis of what is being allocated or directly expensed to the pro-
gram. He would like you to either (1) develop a way to expense more into the program
and force the state to raise rates, or (2) reallocate expenses to other programs that have
surplus funds. Prepare a listing of expenses, including the administrative allocation,
that are included in the proposed budget in questions 2 and 3 above. Next to each item,
indicate whether there is an ethical problem (or not) in shifting costs. Prepare a memo
to the Board of Directors with a summary of your findings.

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Issues in Accounting Education, February 2008

EXHIBIT 1
Partially Completed Worksheet

1

2

3
4
5

6

7
8
9

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48

A B C D E F
Extended Family Current Budget

Total Counseling Education Residential Administration
Revenue
Intake
Individual
Family
Group
Education
Residential
Contributions
Interest Income

Total Revenue – – – – –

Expenses
Salaries
Benefits
Rent, houses 12,000 12,000
Rent, office
Insurance, Vehicle 1,500 1,500
Insurance, General 10,000 10,000
Insurance, Board 2,500 2,500
Travel/conference
Cleaning, office
Office Supplies
Depreciation 12,000
Bank Fees 350 350
Meal, board/staff parties 900 900
Lease, copier
Lease, Postage Machine
Lease, Van – North House 4,800 4,800
Lease, Van – South House 4,200 4,200
Utilities, house 3,300 3,300
Payroll Service Charge
Education, Literature 2,500 2,500
Postage 2,000 2,000
Recrea tion 1,500 1,500
Audit Fees 5,000 5,000
Telephone, office
Telephone, client 4,200 4,200
Program Supplies, group 350 350
Program Supplies, North House 3,000 3,000
Program Supplies, South House 4,500 4,500
Maintenance, North House 1,300 1,300
Maintenance, South House 1,500 1,500

Total Expenses 65,4 00 350 2,50 0 41,800 32,750

Surplus (Deficit) (65,4 00) (350) (2,50 0) (41,800) (32,750)

Developing an Operating Budget for Extended Family, Inc. 139

Issues in Accounting Education, February 2008

LEARNING OBJECTIVES, IMPLEMENTATION GUIDANCE, AND APPENDIX
OF SUPPLEMENTARY NOT-FOR-PROFIT INFORMATION

Learning Objectives
The primary learning objective of this case is for students to allocate costs across

multiple programs within a not-for-profit organization. The secondary objective is for stu-
dents to demonstrate critical-thinking skills and identify solutions that will allow the or-
ganization to remain viable. The case simulates the difficulty many not-for-profit organi-
zations experience, with no increase in rates of reimbursement from government funding.

Students fulfill the primary learning objective by completing a current-year operating
budget that results in a deficit for the organization. Their next step is to develop a budget
for the following year, using specific information that includes both opportunities for the
organization as well as constraints. Students then meet the secondary learning objective by
developing strategies for the organization to remain viable. Students are given several areas
as suggestions for solutions, but are also allowed to offer their own suggestions.

Intended Courses and Audience
The case has been used successfully with graduate students and upper-level undergrad-

uates in a not-for-profit accounting course. If used with students who have limited experi-
ence with the not-for-profit area, then helpful prerequisite knowledge would include the
basics of not-for-profit accounting regulations, accounting for contributions, and financial
statements for not-for-profit organizations. The Appendix of supplementary and background
information is included for students lacking this background.

Teaching and Implementation Plan
There are numerous ways faculty can use this case. It has been used successfully as

an individual or small group project. Questions 1 through 4 require the students to complete
the budget process, while questions 5 through 7 can be added into the project together,
separately, or in combinations. Case questions also provide opportunities for classroom
discussion before or after students complete the case. Depending upon whether the case is
completed individually or within a group, students can complete the case in 10–20 hours,
based on student responses to a case questionnaire. We have typically assigned the case as
an individual effort when the class size is small, thereby allowing for student presentations.
The students are required to present the solution as if they were presenting to the board of
directors for their approval. When students are completing the case individually, they are
given the assignment at the beginning of the course, with a completion date near the end
of the semester.

If the class size is too large for individual presentations or if students enroll in classes
during shorter terms, then dividing the class into groups may be more effective. Another
option is to have students complete the initial budget in class and then assign them to
complete the proposed budget. Additionally, if the requirement to allocate administrative
costs is waived, then it is possible to assign an individual or a group the responsibility of
completing the case requirements for only one specific cost center. Last, case question 5
pertaining to strategies can be omitted from the case requirements and completed as a class
discussion.

Revenue check figures from the current year’s budget developed as question 1 may be
given to students to ensure they calculate the departmental revenue correctly. Alternately,
it may be helpful to review the students’ completed current-year budget prior to beginning
the proposed budget to ensure students are on track with their revenue. This suggestion
will avoid a student or group from having a deficit that is too large.

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Issues in Accounting Education, February 2008

Students should be reminded to think of reasonableness in creating the budget. For
example, students should be encouraged to consider where the organization would place
eight more counselors, or who would complete the Director of Administration’s duties if
this position was eliminated. Students should also not be allowed to include any option that
would be considered a one-time, grand gesture, such as an unplanned grant that would
eliminate all deficits or receiving contributions that are not specified in the case information.
The case specifically states that only one special fundraising event can be included in the
proposed budget; however, students often suggest more events and believe that more than
one can be accomplished. This issue provides an opportunity for the instructor to discuss
the importance of a program’s viability and to emphasize that not-for-profits cannot rely
solely on an increase in contributions without determining whether their programs are
operating efficiently or looking for alternative revenue streams that could be received
continually.

Students should submit a written report in addition to the budget narrative. The written
report should include formula sheets, similar to those that included in the Teaching Notes,
that show how the students calculated the revenue and performed the cost allocations. The
written report could also include options the students may have tried and rejected while
developing the proposed budget. Since there are many formats for budget and narrative
presentation, students should also receive explicit presentation guidelines. Any local con-
vention of not-for-profit fees may also be incorporated into the case, so students develop a
realistic approach from their community.

Classroom Validation
This case has been used successfully with graduate classes in Budget and Financial

Management of Human Service Organizations, and undergraduate courses in Government
and Not-For-Profit Accounting. One objective of the courses was to develop, use, and
evaluate budgets as they relate to the goals of a human service organization. The students
in the graduate program typically have an undergraduate degree in social work or sociology.

Classroom experience indicates that students will comment on the intensity of the case,
to which we would agree, so they should be encouraged to take the case one step at a
time to make it more manageable. In course evaluations, all students agreed that the goals
of the course had been met. Specifically, close to 70 percent of the students in the class
commented that this case was the most beneficial part of their learning. At the time of this
writing, the average student rating of the course question ‘‘the assignments / projects / papers
helped me to develop a better understanding of course contents’’ is 6.7 out of a maximum
ranking of 7 (strongly agree).

After the Fall 2004 graduate class and Spring 2005 undergraduate class completed the
case, students were given a questionnaire and asked to rate their perceived knowledge
related to budgeting, cost allocation, and making major programmatic decisions prior to
completing the case and after completion.

Of the students responding, 59 percent of the undergraduates were neither currently
employed nor were they ever employed in a not-for-profit organization. All of the graduate
students were employed in a not-for-profit organization, primarily between one and five
years and in positions that were either direct service or direct service with partial admin-
istration. The undergraduate students completed the case in small groups, and the graduate
students completed the case individually. There were no significant differences in the ques-
tionnaire responses based upon student level of education or employment.

Developing an Operating Budget for Extended Family, Inc. 141

Issues in Accounting Education, February 2008

The following table represents the percentage of responses related to student self-
assessment of their knowledge prior to completing the case. The respondents selecting
‘‘very poor’’ were all graduate students.

Very Poor Poor Fair Good Very Good

My knowledge of budgeting was … 12.5 8.3 54.2 25.0 0
My knowledge of allocating direct costs was … 12.5 16.7 41.7 20.8 8.3
My knowledge of allocating overhead costs

was …
12.5 16.7 50.0 16.7 4.1

My experience in making major programmatic
decisions was …

8.3 20.8 54.2 12.5 4.2

The following table represents the percentage of responses related to student self-
assessment of their knowledge after completing the case.

Very Poor Poor Fair Good Very Good

My knowledge of budgeting is … 0 0 4.2 58.3 37.5
My knowledge of allocating direct costs is … 0 0 12.5 62.5 25
My knowledge of allocating overhead costs is … 0 0 16.7 54.2 29.1
My experience in making major programmatic

decisions is …
0 0 20.8 58.4 20.8

APPENDIX
SUPPLEMENTARY NOT-FOR-PROFIT INFORMATION

This supplement provides information on not-for-profit organizations that may be help-
ful for students completing the case. The information is categorized based on the case
questions.

Questions 1, 2, and 3
These questions address creating a budget that includes cost allocations and contribu-

tions. Information related to cost allocations can be accessed from any cost accounting
textbook. However, allocations specifically related to not-for-profit organizations can be
reviewed using GAAP for Not-For-Profit Organizations, OMB Circular A-122, or other
sources listed in the bibliography. OMB Circular A-122 is specific to federal contracts, but
stands as a basis for other funding groups to use in determining allowable costs for reim-
bursement. In addition to proving guidance for direct and indirect cost allocations, it also
provides guidance on allowable costs. For example, OMB Circular A-122 includes the
following information for public relations costs:

The term public relations includes community relations and means those activities ded-
icated to maintaining the image of the organization or maintaining or promoting under-
standing and favorable relations with the community or public at large or any segment of
the public.

The only allowable public relations costs are:

(1) Costs specifically required by sponsored awards;
(2) Costs of communicating with the public and press pertaining to specific activities or

accomplishments that result from performance of sponsored awards (these costs are
considered necessary as part of the outreach effort for the sponsored awards); or

(3) Costs of conducting general liaison with news media and government public relations
officers, to the extent that such activities are limited to communication and liaison

142 Mammano and Tyson

Issues in Accounting Education, February 2008

necessary to keep the public informed on matters of public concern, such as notices of
contract / grant awards, financial matters, etc.

Accounting for contributions is covered in detail in SFAS No. 116. Basically, contri-
butions received by not-for-profit organizations are classified as unrestricted, temporarily
restricted, or permanently restricted. The classification is driven by the contributor’s inten-
tion and imposed restriction. If a donor sends a contribution requesting that it be restricted
to a purpose that is within the organization’s general purpose, then that contribution would
not be considered restricted. For example, a donor sends a check to an organization that
provides community education for eating disorders, good nutrition, and benefits of organic
food. The donor sends a note with the check stating that the check should be used for good
nutrition education. Since that request meets one of the organization’s purposes, the con-
tribution is not considered restricted.

Temporarily restricted contributions are donor-restricted for a specific purpose. They
are recorded as temporarily restricted revenue and only ‘‘released’’ when the purpose has
been met. The purpose may be met through the passage of time or after a specific act
has occurred. For example, a donor sends a contribution to be used to purchase a computer.
When the organization buys the computer, the organization will release the amount from
the temporarily restricted funds. Another example would be a donor sending a contribution
that could be used after it gained 60 days of interest. The organization would release that
money from temporarily restricted funds on day 61. Permanently restricted contributions,
generally endowments, can never be released from restriction. In many cases endowments
are established for the purpose of ensuring ongoing financial support through the use
of the interest earned on the funds. Only the donor can establish restrictions. If a board of
directors decides to set unrestricted money aside as an endowment, then it is considered a
quasi-endowment and is reported as unrestricted contributions.

Contributed services are also recorded by the organization only if the services being
provided require special skills and would have been purchased by the organization, such
as accountants or lawyers. To record these contributions the organization would determine
the fair market value, or the amount they would pay if they were to hire an individual on
their staff to provide the service. If the organization would not have purchased the services
provided by the contribution, then they do not need to be recorded.

Question 5
Question 5 requires students to list strategies for the organization to remain viable. The

suggestions listed are the authors’ ideas, and students should be encouraged to think of
alternate solutions and not be limited to the ideas listed in the case. The only suggestion
listed in the case that requires additional information from outside sources is related to the
pursuit of a for-profit endeavor. If students consider that option, then they are also asked
for information regarding the additional tax-reporting requirement. If the unrelated activity
is one that is regularly carried on and has income of $1,000 or more, then the organization
must complete a 990-T and pay tax on that income. An activity that is regularly carried on
is one that is frequent or continual.

Determining whether the activity is related to the exempt purpose is also based on
whether it contributes importantly to the purpose. The IRS Publication 598 includes many
examples of activities that have been determined to be related or unrelated to an organi-
zation’s exempt purpose.

Developing an Operating Budget for Extended Family, Inc. 143

Issues in Accounting Education, February 2008

Question 6
Question 6 requires students to prepare a pro forma Statement of Activities and State-

ment of Functional Expenses. The full requirements for reporting can be found in SFAS
No. 117. This statement also required a new model, the net asset model, to be used in
financial reporting. Under this model, revenue increases the organization’s assets, and ex-
penses decrease the assets.

The Statement of Activities is the summary of revenue and expenses and is reported
with categories for unrestricted, temporarily restricted, and permanently restricted funds.
An additional statement, the Statement of Functional Expenses, accompanies the Statement
of Activities and is used to report revenue and expenses categorized by major program.

Question 7
Question 7 is an ethical question related to cost allocation in cost reports for rate

reimbursement. Using their own comfort in shifting costs, students are asked to complete
the board members’ request. There have been many instances in the not-for-profit industry,
and in particular in health care, where costs have been inflated leading to overpayments to
health care providers. In 1998 the Office of Inspector General mandated corporate compli-
ance programs for hospitals, and subsequently for other health care facilities. Since one of
the reasons for the compliance program was to prevent fraud, many other regulatory or-
ganizations have required other non-healthcare related organizations to follow a compliance
program. Below is an excerpt taken from the Federal Register, Vol. 63, No. 35, Monday,
February 23, 1998, regarding cost reports as related to a compliance program:

d. Cost reports. With regard to cost report issues, the written policies should include
procedures that seek to ensure full compliance with applicable statutes, regulations and
program requirements, and private payor plans. Among other things, the hospital’s pro-
cedures should ensure that:
● Costs are not claimed unless based on appropriate and accurate documentation;
● Allocations of costs to various cost centers are accurately made and supportable by

verifiable and auditable data;
● Unallowable costs are not claimed for reimbursement;
● Accounts containing both allowable and unallowable costs are analyzed to determine

the unallowable amount that should not be claimed for reimbursement; and
● Costs are properly classified.

TEACHING NOTES
Teaching Notes are available only to full-member subscribers to Issues in Accounting

Education through the American Accounting Association’s electronic publications system
at http: / / www.atypon-link.com / action / showPublisherJournals?code�AAA. Full-member
subscribers should use their personalized usernames and passwords for entry into the system
where the Teaching Notes can be reviewed and printed.

If you are a full member of AAA with a subscription to Issues in Accounting Education
and have any trouble accessing this material, then please contact the AAA headquarters
office at office@aaahq.org or (941) 921-7747.

SUGGESTED BIBLIOGRAPHY
Anthony, R. N. 1996. Coping with nonprofit accounting rules. The CPA Journal 66: 50–52.
*Foran, N. J., and B. A. Theisen. 2000. The business of charity. Journal of Accountancy 190 (6): 77–

80.

http://www.atypon-link.com/action/showPublisherJournals?code=AAA

144 Mammano and Tyson

Issues in Accounting Education, February 2008

*Foster, M. F., H. Becker, and R. J. Terrano. 1998. GAAP for Not-For-Profit Organizations. Orlando,
FL: Harcourt Brace & Company.

*Luecke, R. W., and K. J. Shortill. 1999. IRS issues new disclosure rules for tax exempt organization.
Healthcare Financial Management 53 (12): 52–54.

Mancuso, A. 1997. How to Form a Nonprofit Corporation in All 50 States. 4th edition. Berkeley, CA:
Nolo Press.

Martin, L. L. 2001. Financial Management for Human Service Administrators. Boston, MA: Allyn
and Bacon.

*McLauglin, T. L. 2002. Streetsmart Financial Basics for Nonprofit Managers. 2nd edition. New
York, NY: John Wiley & Sons.

Ruppel, W. 2002. Not-for-Profit Accounting Made Easy. New York, NY: John Wiley & Sons.
Samuels, D. G., and M. Shoretz. 2002. Intermediate sanctions for healthcare organizations. Healthcare

Financial Management 56 (9): 74–76.
*Yetman, R. J. 2001. Tax motivated expense allocations by nonprofit organizations. The Accounting

Review 76 (3): 297–311.

ADDITIONAL RESOURCES
● *Internal Revenue Publication 598 (Rev March 2000).
● *Internal Revenue Service website, http: / / www.irs.gov.
● The Chronicle of Philanthropy website. http: / / philanthropy.com /
● *Joint Program and Fundraising Costs AICPA SOP 98-2
● Excessive Benefits and Executive Compensation IRS Code 4958
● Office of Inspector General website http: / / oig.hhs.gov /
● Association of Fundraising Professionals http: / / www.afpnet.org
● *OMB Circular A-122 Cost Principles for Non-Profit Organizations http: / / www.

whitehouse.gov / omb / circulars / a122 / a122.html

* Contain information that is the most helpful for students who have a limited background in not-for-profit
organizations.

http://www.irs.gov

http://philanthropy.com/

http://oig.hhs.gov/

http://www.afpnet.org

http://www.whitehouse.gov/omb/circulars/a122/a122.html

http://www.whitehouse.gov/omb/circulars/a122/a122.html