Operational anxiety: the allocation of indirect costs can make club budgeting a nightmarish proposition. The authors suggest that it doesn't have to be that way.The budget process is an arduous ar·du·ous adj. 1. Demanding great effort or labor; difficult: "the arduous work of preparing a Dictionary of the English Language" Thomas Macaulay. 2. task that is often undertaken with a great amount of trepidation trepidation /trep·i·da·tion/ (trep?i-da´shun) 1. tremor. 2. nervous anxiety and fear.trep´idant trep·i·da·tion n. 1. An involuntary trembling or quivering. and anxiety. Numerous decisions and estimates are required to establish an operating budget Noun 1. operating budget - a budget for current expenses as distinct from financial transactions or permanent improvements budget items, operating cost, operating expense, overhead - the expense of maintaining property (e.g. . This includes determining the services that will be provided and estimating the costs of providing each of the services. Although adopting a "same as last year" policy in budgeting decisions is the easiest and most common approach, it may not be the best option. For example, both direct and indirect costs Indirect costs are costs that are not directly accountable to a particular function or product; these are fixed costs. Indirect costs include taxes, administration, personnel and security costs. See also
n the minimal expenditure of dollars, time, and other elements necessary to achieve the health care result deemed necessary and appropriate. way. Direct costs include salaries for the social director, golf professional, and tennis professional. These costs can be easily traced to social, golf, and tennis services respectively. Indirect costs include general administrative expenses, real estate taxes, and insurance. Although these costs are necessary, they cannot be easily traced to a particular service or membership category. Since indirect costs cannot be traced to a membership category in a cost-effective way, they are somewhat arbitrarily allocated to the membership categories. Two common ways of allocating indirect costs are incremental Additional or increased growth, bulk, quantity, number, or value; enlarged. Incremental cost is additional or increased cost of an item or service apart from its actual cost. cost-allocation and the use of a cost-allocation base. Each of these cost-allocation procedures may result in significantly different allocations, and understanding the underlying premise of each methodology and the impact on member dues is essential in the budgeting process. Incremental cost-allocation requires a rank ordering of the users of the indirect costs. For example, the membership category that receives the greatest benefit from the indirect cost is considered the primary user. The indirect costs required to support the primary user are allocated to the primary user budget. If additional indirect costs are required because there are two (three) users, the incremental indirect costs are allocated to the second (third) users. In a typical country club, the social membership category receives the greatest benefit from indirect costs and would be considered the primary user. The golf (tennis) membership category would likely be ranked second (third) in usage of indirect costs. To determine the costs allocated to the social budget, an estimate of indirect costs without golf or tennis programs is necessary. Any additional indirect costs that result because of the golf program are allocated to the golf budget. Any further indirect costs that result because of the tennis program are allocated to the tennis budget. Alternatively, if a cost-allocation base is used to allocate To reserve a resource such as memory or disk. See memory allocation. indirect costs, a base with a positive relation to the indirect cost is selected. Generally, larger operations consume more indirect costs; therefore, a proxy See proxy server. (networking) proxy - A process that accepts requests for some service and passes them on to the real server. A proxy may run on dedicated hardware or may be purely software. for the size of the operation is used to allocate indirect costs. For example, budgeted direct costs or number of direct labor employees may be used. Consider a country club with a total of 700 members that offers three categories of membership and prepares separate budgets for each of the membership categories. All members are social members and may elect to add tennis and/or and/or conj. Used to indicate that either or both of the items connected by it are involved. Usage Note: And/or is widely used in legal and business writing. golf memberships. Although not required, the club sets member dues based on the estimated membership level in each membership category and the estimated costs and revenues that result from the services provided to each membership category. The result of this process is a balanced budget Balanced budget A budget in which the income equals expenditure. See: budget. balanced budget A budget in which the expenditures incurred during a given period are matched by revenues. where total member dues plus other revenues in each member category is equal to total costs in each member category. Specific membership levels, budgeted cost, and employee levels are shown in Figure 1. Without considering revenues and indirect costs, each member's share of the budgeted expenses is $2,805, $249, and $4,710 for social, tennis, and golf respectively. However, all clubs incur To become subject to and liable for; to have liabilities imposed by act or operation of law. Expenses are incurred, for example, when the legal obligation to pay them arises. An individual incurs a liability when a money judgment is rendered against him or her by a court. indirect costs that must be considered in the budgeting process. Allocation The apportionment or designation of an item for a specific purpose or to a particular place. In the law of trusts, the allocation of cash dividends earned by a stock that makes up the principal of a trust for a beneficiary usually means that the dividends will be treated as of General Administrative Expenses The NCA (Network Computing Architecture) An architecture from Oracle for developing applications within a networked computing environment. It provides a three-tier distributed environment based on CORBA that uses program components known as "cartridges. 2004 Club Operations and Financial Data Report states that administrative expenses constitute 29 percent of a country club's total expenses. Therefore, careful consideration is warranted when allocating these indirect costs. Figure 2 assumes total administrative costs administrative costs, n.pl the overhead expenses incurred in the operation of a dental benefits program, excluding costs of dental services provided. of $663,605 and allocates the administrative costs using incremental-costing and two different cost-allocation bases: direct cost and number of direct employees. The incremental costing Incremental Cost The encompassing change that a company experiences within its balance sheet due to one additional unit of production. Notes: Incremental cost is the overall change that a company experiences by producing one additional unit of good. example assumes that the social category is the primary user of administrative services. Specifically, a total of $603,277 in administrative costs would be incurred if no golf or tennis program were offered. Golf services require an additional $60,328 in administrative costs. There is no increase in administrative costs from the tennis services. The percentage of administrative costs allocated to each budget using budgeted direct costs is determined by dividing category direct costs by total direct costs. For example, the administrative cost administrative cost Managed care A cost incurred by the 'business' end of a health care facility or university–eg, staffing and personnel costs, nursing home and hospital administration, insurance, and overhead expenses. Cf Indirect costs. allocated to the social budget is equal to 663,605 * (1,963,254/ 3,733,895). Similarly, the percentage of administrative costs allocated to each budget using number of direct employees is determined by dividing the number of direct employees in a category by total direct employees. For example, the administrative cost-allocated to the social budget is equal to 663,605 * (39/61). (* In the illustration, 490 of the 700 members are also tennis members, and 350 of the 700 members are also golf members.) The illustration shows that different cost-allocation methods result in significant differences in cost to each member category. Each member's share of the social budget could be as low as $498 or as high as $862. Each member who opts to add a golf membership could pay as little as $172 or as much as $837 toward the golf budget. Allocation of Real Estate Taxes The detail available on real estate tax statements varies significantly across taxing authorities. In some instances, determining the taxes associated with golf course property, tennis property, and general club property is easily determinable Liable to come to an end upon the happening of a certain contingency. Susceptible of being determined, found out, definitely decided upon, or settled. determinable adj. from the tax statements. In other cases, the value of the golf course property, tennis property, and general club property can be estimated and the relative values can be used to allocate the total tax bill to the membership categories. An alternative view for allocation of real estate taxes is based on the idea that real estate taxes result from ownership rather than use. Accordingly, it follows that real estate taxes should be borne equally by all members rather than allocated to the membership categories that use the property. The NCA 2004 Club Operations and Financial Data Report states that the average amount of real estate taxes paid by country clubs is $159,488. Figure 3 shows the differences that could result if real estate taxes are allocated based on use and if real estate taxes are allocated based on ownership. The allocation method based on use assumes that social property represents 65 percent of the value of all club property. Tennis and golf property represents five percent, and 30 percent of total club property respectively. The illustration shows that the social member's share of property taxes can range from $148 to $228, while the golf member's share of property taxes can range from $0 to $137. Allocation of Insurance The NCA 2004 Club Operations and Financial Data Report states that the average amount of insurance paid by country clubs is $115,633. These costs can include premiums paid to insure Insure can mean:
Property insurance can be viewed similarly to real estate taxes. The premiums associated with property insurance can be distributed to the membership classifications based on estimated relative property values. Alternatively, property insurance can be considered a function of owner ship and borne by all members equally. Figure 4 presents allocations of insurance of $75,000 if the allocation is based on ownership and if the allocation is based on use. If the allocation is based on use, the illustration assumes that tennis (golf) property represents five (35) percent of total property value. The choice of allocation method results in significant differences in the cost per member. The cost for social members ranges from $64 to $107, and the cost for golf members ranges from $75 to $0. The liability insurance premium results from risk of injury, and risk of injury can vary across club activities. The liability insurance premium can be allocated using an incremental costing approach or by selecting a cost allocation base. If the incremental costing approach is used and it is assumed that the social membership is the primary user of insurance, an estimate for liability insurance without tennis or golf operations is allocated to the social budget. Any additional liability premiums that result due to tennis (golf) operations are allocated to the tennis (golf) budget. Alternatively, an allocation base that bears a relation with risk can be used to allocate the liability insurance premium. Although there are no measures that are perfectly correlated cor·re·late v. cor·re·lat·ed, cor·re·lat·ing, cor·re·lates v.tr. 1. To put or bring into causal, complementary, parallel, or reciprocal relation. 2. with risk, number of employees or budgeted expenses can serve as reasonable proxies. Assuming a liability insurance premium of $25,000 and a 30 percent incremental cost for golf operations and an additional 10 percent incremental cost for tennis operations, Figure 5 shows the differences that can result between the allocation methods. The differences in cost per member for liability insurance in this illustration are not as significant between the selected cost-allocation methods. The similarity Similarity is some degree of symmetry in either analogy and resemblance between two or more concepts or objects. The notion of similarity rests either on exact or approximate repetitions of patterns in the compared items. between the costs per member primarily results because the total allocated cost is a relatively small amount. While there is no single correct solution to the allocation of indirect cost, it is important to understand the impact of cost-allocations on member dues. Changes in cost structures and membership levels suggest a need for a periodic review of cost allocation procedures. Although consistency Consistency can refer to:
EQUITABLE. membership dues.
FIGURE 1
Total Social Tennis Golf
Membership Level 700 700 490 350
Direct Costs ($)
Food & Beverage Expenses 1,344,855 1,344,855
Golf Department Expenses 1,648,605 1,648,605
Tennis Expenses 122,036 122,036
Pool Expenses 90,677 90,677
Fitness Facility Expenses 165,659 165,659
Overnight Room Expenses 362,063 362,063
Total Direct Cost 3,733,895 1,963,254 122,036 1,648,605
Total Direct Cost Per
Member 2,805 249 4,710
Indirect Costs ($)
General Administrative
Expenses 663,605
Real Estate Taxes 159,488
Insurance 115,633
Direct Labor Employees
Food & Beverage 31 31
Golf 17 17
Tennis 5 5
Fitness 4 4
Swimming 4 4
Total Direct Labor
Employees 61 39 5 17
Indirect Labor Employees
Administration 8
Total Employees 69
FIGURE 2
Administrative Costs ($) Total Social Tennis Golf
Incremental Costing 663,605 603,277 0 60,328
Cost Per Member 862 0 172
Percentage of Direct Costs 663,605 348,919 21,689 292,998
Cost Per Member 498 44 837
Percentage of Direct Employees 663,605 424,272 54,394 184,939
Cost Per Member 606 111 528
FIGURE 3
Real Estate Taxes ($) Total Social Tennis Golf
Allocation Based on Ownership 159,488 159,488 0 0
Cost Per Member 228 0 0
Allocation Based on Use 159,488 103,667 7,974 47,846
Cost Per Member 148 16 137
FIGURE 4
Property Insurance ($) Total Social Tennis Golf
Allocation Based on Ownership 75,000 75,000 0 0
Cost Per Member 107 0 0
Allocation Based on Use 75,000 45,000 3,750 26,250
Cost Per Member 64 8 75
FIGURE 5
Liability Insurance ($) Total Social Tennis Golf
Incremental Costing 25,000 17,857 1,786 5,357
Cost Per Member 26 4 15
Percentage of Direct Costs 25,000 13,145 817 11,038
Cost Per Member 19 2 32
Percentage of Direct Employees 25,000 15,984 2,049 6,967
Cost Per Member 23 4 20
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