Chapter 17

Managing for Results

/(CHAPTER 17)

1. Zero-base budgeting requires the periodic review of all programs, not just new ones.
2. It is difficult for accountants to have a role beyond auditing the financial statements of governments and not-for-profits.
3. One of the principal disadvantages of zero-base budgeting is that it requires budgetary units to provide information that may never be used in the decision process.
4. Many of the benefits of program budgeting may be ascribed to the organizational self-examination that it requires at the outset.
5. Most accounting organizations support the notion that performance measures should be included in general-purpose annual financial reports.
6. The GASB’s SEA indicators focus on measures of efforts, measures of accomplishments, and measures that relate efforts to accomplishments.
7. Rather than cash inflows, the potential benefits of many capital assets can be expressed as cash savings to governments and not-for-profits.
8. It is widely accepted that capital assets should be financed with resources on hand to achieve interperiod equity.

9. Program outcomes frequently are more difficult to measure than inputs and outputs.

10. An important part of capital budgeting is to compare alternative means of achieving the same objective.

11. Benefit-cost analysis has fallen from favor among management experts because it relies exclusively on measurable, tangible, readily measured amounts and leaves no room for consideration of more abstract concepts like the value of life.

12. A disadvantage of evaluating capital expenditures separately from operating expenditures is that it is easy to overlook operating costs associated with newly acquired assets.

1. The term “operational objective” denotes the abstract, overarching aims of an organization and is akin to a corporate mission statement.
2. Development, implementation, and assessment of social programs is routine, discrete and follows a set of systemized rules similar to development, implementation and assessment of accounting systems and financial statements.
3. Operational objectives should emphasize outcomes, not outputs.

ANSWERS TO /(CHAPTER 17)

9.

10.

11.

12.

13.

14.

15.

MULTIPLE CHOICE (CHAPTER 17)

1. In which of the following steps of the management cycle of governments and not-for-profit entities are accountants least involved?
2. Performing cost benefit analysis on proposed programs.
3. Selecting among alternative programs.
4. Preparing financial reports.
5. Evaluating efficiency and effectiveness of programs.
6. Accountants are actively involved in collecting and analyzing data to be used by public policy makers. Which of the following other groups might also be involved in the data collection and analysis process?
7. Statisticians.
8. Economists.
9. Program managers.
10. All of the above.
11. Accountants have a significant role in all of the following steps in the management cycle of social programs, except:
12. Perform cost-benefit analysis for programs
13. Establish policies through legislation
14. Prepare financial statements and other reports
15. Evaluate efficiency and effectiveness of programs
16. Which of the following is a statement regarding the implementation phase of a government program?
17. Internal accountants are not involved; only program managers are involved.
18. Internal accountants are actively involved, preparing budgets, controlling costs, and preparing operating reports.
19. Internal accountants have only a minor role, preparing reports for external parties.
20. Internal accountants have final say in all operational program choices measurable with financial variables.
21. Operational objectives for a social organization should be:
22. clearly assessed using only one measurement.
23. defined in general terms to allow for varying interpretations.
24. readily measurable, even if those measurements are not perfect measures of the desired outcomes.
25. long range goals with a one, two or three decade time horizon.
26. All governments and not-for-profit entities should establish goals and objectives. Which of the following is a desirable characteristic of an operational objective?
27. An operational objective should be open to interpretation.
28. An operational objective should be measurable.
29. An operational objective should be a statement of aspirations.
30. An operational objective should be accomplishable by an unspecified future date.
31. An accounting program has determined that preparing students for careers in public accounting is the program's goal. Which of the following measurements is the best outcomes measurement for this accounting program?
32. Number of accounting majors that graduate.
33. Number of students that pass the CPA examination.
34. Number of students in management positions in public accounting firms ten years after graduation.
35. Number of students without debt after graduation.
36. Which of the following groups are involved in auditing a program?
37. Accountants.
38. Statisticians.
39. Economists.
40. All of the above.

Use the following information to answer Questions 9 and 10.

A piece of federal legislation has as one of its objectives “improving the health of older Americans.” Title 20 of that legislation provides for granting federal funds to governments and not-for-profit entities to provide nutritious hot meals to older Americans in congregate settings. Caddisfly Senior Citizens Center, a not-for-profit entity, receives funding under this legislation. The center determines the following for a one-month period:

Number of meals served 500

Total number of individuals participating in the program 25

Total meals costs incurred $860

Average cost per meal $1.72

1. The numerical value that best represents outputs of this program is
2. 500
3. $1.72
4. $860
5. None of the above.
6. The numerical value that best represents outcomes is
7. 500
8. $1.72
9. $860
10. None of the above.
11. College professors are evaluated on teaching, research, and service. Which of the following would be a surrogate for the desired operational objective of "Engage in research that expands the horizons of knowledge"?
12. Value of research grants received.
13. Number of publications in peer-reviewed journals.
14. Both of the above.
15. Neither of the above.
16. Because of the difficulty of measuring quality teaching, many colleges and universities rely heavily on student evaluations of the quality of instruction and accomplishment of course objectives. Which of the following is (are) a statement(s)?
17. This is a good practice, which may improve the quality of instruction.
18. This is a good idea but may have unintended negative consequences by causing faculty to decrease the rigor of a course.
19. Both are
20. Neither is
21. Which of the following is NOT an example of a performance budget?
22. Program budget.
23. Object classification budget.
24. Zero-base budget.
25. Priority-based budget.
26. Which of the following is about zero-based budgeting?
27. It is a variant of program budgeting.
28. It requires activities of the entity to be evaluated over a five-year period.
29. It currently is used by most state and local governments.
30. It is incremental in approach.
31. Hercules Beetle Help, Inc., a not-for-profit entity dedicated to providing assistance to the needy, has submitted to its governing body a budget that includes the following budgeted expenditures.

Nutrition $250,000

Family housing assistance $300,000

Shelter House $200,000

Legal aid $100,000

Medical assistance $150,000

Which of the following best describes the budgeting practices of this entity?

1. The entity uses program budgeting techniques.
2. The entity uses object classification budgeting techniques.
3. The entity uses zero-base budgeting techniques.
4. The entity uses priority-based budgeting techniques.
5. Which of the following is an advantage of program budgeting over traditional budgeting techniques?
6. It promotes continuation of existing programs.
7. It relates expenditures to objectives.
8. It encourages consideration of alternative means of accomplishing the objective.
9. Both b) and c).
10. Potential unintended, negative consequences of openly stated operational objectives include all of the following except:
11. Employees being unaware of what management deems to be the important role of the organization in society.
12. Introducing or exacerbating conflict between employees with different roles in the organization.
13. Incentivizing employees to manipulate measures that the management has deemed important.
14. Encouraging employees to focus on only particular elements of their job that are readily measurable as opposed to activities that are actually consistent with the organization’s objectives.
15. Which of the following is a reason for governments and not-for-profit entities to incorporate service efforts and accomplishments (SEA) measures into their management process?
16. Measuring and reporting upon SEA helps management determine short-term cash flow requirements.
17. SEA measures allow management to make objective assessments about whether the goals of the government are worth achieving.
18. SEA reporting fosters sound budgeting and administration.
19. SEA fosters budgetary compliance and custodianship of resources.
20. Which of the following is NOT one of the three categories of SEA measures identified by the GASB?
21. Measures of efforts.
22. Measures of financial stewardship.
23. Measures of accomplishment.
24. Measures that relate efforts to accomplishments.
25. Which of the following is an example of a cost-outcome measure?
26. Cost per passenger-mile on public transit.
27. Cost per hot meal served.
28. Cost per legal case handled.
29. Cost per client placed in gainful employment.
30. Which of the following is an example of an efficiency measure?
31. Cost per client placed in an appropriate job.
32. Cost per ton of garbage collected.
33. Cost per gallon of water suitable for drinking.
34. Cost per child reading at grade level.
35. With regard to audits of SEA, which of the following might be appropriate for an auditor to do?
36. Assess the appropriateness of the organization’s basic objectives.
37. Verify that the government selected the correct indicators to gauge whether its objectives were achieved.
38. Evaluate whether SEA data is fairly presented.
39. Evaluate the usefulness of SEA data.

Use the following information to answer Questions 26 through 29.

The Alstroemeria City Swimming Pool is considering several options for maintaining the grounds around the pool area over the next ten years. One option is to buy a tractor with equipment for cleaning the underbrush and cutting the grass. A second option is to contract out with a local garden and nursery center that provides this kind of service. A third option is to hire many local youths to do most of the work by hand. Alstroemeria City already has several small lawnmowers and grass-cutting equipment.

Option #1

Cost of tractor and equipment (useful life 10 years) $220,000

Salvage value of tractor in 10 years 20,000

Yearly cost of operator 6,000

Yearly maintenance and upkeep, supplies, etc. 3,000

Option #2

Yearly fees $ 36,000

Option #3

Yearly cost of part-time labor $ 32,000

Yearly cost of supplies, equipment repair, etc. 1,000

Present value factors @ 6%

$1 due in ten years .55839

Annuity of $1 for 10 years 7.36009

1. What is the present value of Option #1?
2. $220,000.
3. $275,072.
4. $297,408.
5. $433,442.
6. What is the present value of Option #2?
7. $ 20,102.
8. $ 36,000.
9. $264,964.
10. $285,066.
11. What is the present value of Option #3?
12. $ 18,426.
13. $235,522.
14. $236,080.
15. $242,882.
16. Which option should the city select based solely on cost?
17. Option #1
18. Option #2
19. Option #3
20. Unable to determine.
21. Due to limited resources, Jacaranda City must select from among the following capital projects. Which project should the city select?
22. Court-ordered improvements to the City Jail.
23. Repairing the roof on City Hall.
24. Replacing an inefficient data processing system with a more efficient system.
25. Adding two new police cars to the fleet.
26. Zero-base budgeting is a form of

a) Incremental budgeting introduced in the 1960s.

b) Program budgeting introduced in the 1970s.

c) Performance budgeting introduced in the 1980s.

d) Traditional budgeting revamped for the new millennium.

29. A benefit-cost ratio for a not-for-profit organization’s program is

a) A comparison between cash received and cash paid in a given program year.

b) Total projected annual benefits/total projected costs over the life of a program.

c) Program outcomes over the program inputs for each five-year period.

d) Present value of net annual benefits from a program over theinitial investment in the program.

30. A significant difference between not-for-profit organizations and businesses with regard to investments in capital (fixed) assets is that

a) Not-for-profits generally do not invest in capital assets.

b) Unlike businesses, not-for-profits do not discount projected future cash flows when evaluating the benefit-cost of an asset acquisition.

c) Unlike businesses, not-for-profits do not include the estimated salvage value of a capital asset in considering whether or not to acquire it.

d) When considering the merit of asset acquisitions, maximizing future cash flows is not the principal objective of a not-for-profit.

31. The concepts of outputs and outcomes are not the same because

a) Outputs measure how many units of service an activity produced, whereas outcomes measure the results that the activity produced compared with the activity’s objectives.

b) Outputs are abstract and conceptual, but outcomes are always discrete and quantifiable.

c) Outcomes are subject to audit whereas outputs are not.

d) Outputs can be evaluated in relation to inputs, but outcomes cannot be related to either inputs or outputs.

PROBLEMS (CHAPTER 17)

1. City of Oleander is considering automating a process in its accounting department that has been labor-intensive. The equipment currently used in the department can be sold. The new equipment will have a projected useful life of 10 years. The old equipment has a remaining useful life of 10 years. The following data are available to be used in making the decision. Should the city invest in the new equipment? Support your answer with appropriate calculations.

Current equipment

Current equipment book value $ 30,000

Annual depreciation charges 3,000

Current estimated disposal value 5,000

New equipment

Cost $150,000

Annual depreciation charge 12,500

Expected disposal value 25,000

Labor savings each year $ 50,000

Present value factors @ 6%

$1 due in 10 years .55839

Annuity of $1 for 10 years 7.36009

1. For each of the following organizations, propose at least one measure of outputs and two of outcomes.
2. State University Department of Accounting
3. City Parks and Recreation Department
4. Habitat for Humanity
5. American Cancer Society
6. University Foundation for support of athletics
7. The Plumeria City Parks and Recreation Department has determined the following costs related to its very popular 12-week summer youth program. The number of participants in the program has grown significantly over the past few years to 100 participants last year and the director is preparing for another 10 percent increase in participants next summer. How much should the director request for next year? Calculate at least three different budget requests.

Direct variable costs for a group of 10 children (group worker and supplies) $ 5,500

Number of participants last summer 100

Fixed costs for the summer program $30,000

Allocated fixed overhead: 25% is directly associated with the program,

75% would not be eliminated if the program were eliminated.

Allocated based on number of groups $24,000

1. The Camellia Public Library District currently prepares its budget on an object classification basis. Last year’s budgeted expenditures included these line items:

The district has decided to use program-based budgeting in the future. Based on your knowledge of libraries, what are three programs that might be included in the district’s budget?

1. To enhance security in Angelonia Centenary Park, the City of Angelonia is considering whether it should install a high-tech security system. The system would reduce the cost of police patrols and deter crime. Two independent contractors have proposed competing systems to the city. System A would cost $4 million; System B would cost $6 million. The city estimates that by reducing the cost of police patrols, System A would save $150,000 per year and System B $260,000 per year. The city uses a discount rate of 10 percent to evaluate all capital outlays. It determines that each of the systems would have an economic life of five years.

1. Considering the cost as the initial investment and the benefits as the present value of the cash savings from reduced police patrols, which of the two systems would cost less in relation to benefits? Based only on this criterion, should that system be acquired?

2. Suppose that the city estimates that System A is likely to deter 40 violent crimes per year and that System B is likely to deter 50 violent crimes per year. Which of the two systems would cost less in relation to benefits? Consider cost to be the initial investment less the present value of savings from reduced police patrols.

3. Suppose further that consultants engaged by the city have placed a dollar cost upon violent crime. Taking into account victims’ medical bills and lost wages, they estimate that the present value of net outflows owing to violent crime is $90,000 per victim. Considering the costs as the initial investment and the benefits as the present value of the cash savings (including those from both reduced police patrols and crimes deterred), which of the two systems would cost less in relation to benefits? Based only on this criterion, should that system be acquired?

• • 1. A not-for-profit health organization is reviewing their operational objectives and is currently in the process of developing pairs of outputs and outcomes.

Required:

a. Fill in the table below by with possible outputs or outcomes for blank sections of the table.

b. Describe any concerns you have about how the process for measurement of the outputs might create a divergence between the desired theoretical outcome and the outcome obtained in practice.

ANSWERS TO PROBLEMS (CHAPTER 17)

Problem 1

Buy new equipment

($150,000) = 1.00000 x $150,000 Purchase price of new equipment

13,960 = .55839 x $ 25,000 Disposal value of new equipment in ten years.

5,000 = 1.00000 x $ 5,000 Disposal value of old equipment.

368,005 = 7.36009 x $ 50,000 Cost savings over the ten years.

$236,965

Because the net present value is positive, this is a project that should be undertaken.

Problem 2

[Students will have a variety of answers. Remember that outputs measure quantity of service provided whereas outcomes measure accomplishments.]

a) Output: Number of graduates

Outcomes: Number of students passing the CPA Exam

Number of graduates satisfied in their accounting employment after ten years

b) Output: Number of children participating in the summer youth program.

Outcomes: Reduction in juvenile crime rates

Number of adults satisfied with the youth recreation programs.

c) Output: Number of houses built.

Outcomes: Reduction in number of families living in substandard housing.

Reduction in number of families seeking public assistance for housing.

d) Output: Number of brochures mailed.

Outcomes: Reduction in the number of deaths related to cancer.

Increase in the number of people seeking medical exams for cancer.

e) Output: Amount spent in support of athletic programs.

Outcomes: Increase in the graduation rate among athletes.

Increase in the number of games won.

Problem 3

[Students may have a variety of answers but at least one should be a projection based on average cost.]

Average Cost Projection

$30,000 Fixed costs

$55,000 Direct Costs for 10 groups ($5,500 x 10)

$24,000 Allocated fixed costs

$109,000 / 100 children = $1,090 average cost per child

$1,090 x 110 children = $119,900

Variable Cost Projections

$60,500 ($5,500 x 11 groups)

$30,000 Fixed costs

$26,400 Allocated fixed costs ($24,000 x 1.10)

$116,900

$60,500 ($5,500 x 11 groups)

$30,000 Fixed costs

$24,600 [$18,000 + ($6,000 x 1.10)]

$115,100

Problem 4

[Note: Students will provide a variety of answers to this question.]

Program categories might include:

• Bookmobile
• Audio-visual
• Teen reading
• Senior (large-print) reading
• Children’s reading
• Library district/school district combined programs
• Community outreach
• Administrative support.

Problem 5

1. Benefit-cost ratio based on savings from reduced patrols

System A System B

Initial investment (cost) $4,000,000 $6,000,000

Annual cash savings 150,000 260,000

Present value of an annuity of $1
for 5 years discounted at 10% x 3.79079 x 3.79079

Present value of cash savings (i.e., benefits) $ 568,618 $ 985,605

Ratio of benefits to initial investment 0.1422 0.1643

System B would have the greater ratio of benefits to costs. However, inasmuch as the ratio is far less than 1 (the costs exceed the benefits), it (as well as System A) should be rejected.

2. Cost per crime deterred

System A System B

Initial investment (cost) $4,000,000 $6,000,000

Less: present value of cash savings (per above) 568,618 985,605

Net cost $3,431,382 $5,014,395

Benefits (number of violent crimes deterred) ÷ 40 ÷ 50

Cost per violent crime deterred $ 85,785 $ 100,288

System A costs less in relation to benefits.

3. Costs in relation to savings from violent crimes deterred

System A System B

Initial investment $4,000,000 $6,000,000

Present value of cash savings
from police patrols (per above) $ 568,618 $ 985,605

Plus additional savings from crimes deterred:

Number of violent crimes deterred 40 50

Savings per victim per crime deterred $ 90,000 $ 90,000

Total savings per crime deterred $3,600,000 $ 4,500,000

Total savings $4,168,618 $ 5,485,605

Costs (initial investment) per
dollar of total savings $0.96 $1.09

System A costs less than System B in relation to benefits and, inasmuch as the benefits exceed the costs, it should be acquired. System B costs more than the benefits and therefore should be rejected.

Problem 6

Suggested outputs and outcomes presented below. Given the wide variety of possible combinations of outputs and outcomes this represents possible solutions; actual student responses to this prompt may vary.

a.

b. For the first pair described in the table related to reducing patient deaths the greatest concern with the outputs is completeness. The number of C. diff cases and other types of post-operative infections represent a salient and important portion of deaths unrelated to the patient’s primary concern, however measuring only two possible paths may be insufficient for correctly reflecting the health-care organization’s objective.

Burnout is a significant health care issue facing many individuals and particularly, in light of the longevity of the Covid-19 pandemic, health care professionals. Each of the proposed outputs captures a dimension of burnout, but there are concerns with each measure. Employee turnover captures burnout and a variety of other economic and sociological factors that drive an individual to change jobs. Employee turnover rates are likely to be a useful indication of employee mental health overall, but does not provide information for each individual employee. Measurements of mental health are subject to the types of measurement error described in the psychology literature and additionally, specifically in the context of health professionals, might be subject to manipulation. The number of counseling and resiliency sessions is a good indicator of the availability of resources to improve employee mental health, but quantity of sessions does not necessarily directly translate to improvements in mental health for employees.

Readmissions is a quantifiable measure that is correlated with quality of care, but is an imperfect measure for many reasons. If a patient does not believe they were treated well by a particular health-care organization they may be unlikely to return. If the patient who received poor care switches to a new provider then according to the readmission statistic they will be considered to have received high quality care because they did not return. Readmission rates are also impacted by other factors unrelated to quality of care such as the demographics of patients served, cold and flu season, degree to which the area is impacted by the Covid-19 pandemic, natural disasters, etc.

Patient surveys are subject to many type of potential manipulation, for example, health care providers providing more reminders and encouragement for patients that seemed satisfied with their care to complete the surveys. The surveys themselves may be worded in a way that induces biases by the respondent or does not measure the most important elements of patient care. Survey design is a challenging task and despite many innovations in the area there is likely to always be a gap between the reports received from patients in survey and the way they actually feel about the services they were provided.

ESSAYS (CHAPTER 17)

1. One goal of State University is to prepare students to become valuable, contributing members of society. One goal of the Department of Accounting of State University is to prepare students for meaningful careers as professional accountants. What are goals and objectives? How do they differ and how are they similar? What are outputs and outcomes? What are the outputs and the outcomes directly associated with the goals adopted by the university and the department? How would the university and the department measure achievement of these goals?
2. The GASB has encouraged governments to publish service efforts and accomplishments (SEA) data. What is the role of auditors in attesting to SEA data?
3. Many governments use performance budgets in place of, or as a supplement to, the traditional object classification budget. What is a performance budget? What are the advantages and disadvantages of performance budgets over traditional budgets?
4. The Patton Landfill Authority decides to use zero-base budgeting for the first time. Assume that you are asked to prepare the budget decision package for a proposal to establish a 24-hour drop-off location for large refuse (such as old appliances, furniture and so forth). Patton County, in which the authority is located, has recently experienced a surge in the level of illegal dumping. What are four elements that should be included in your budget decision package for the proposed program?
5. One problem with goals such as these is that accomplishment is difficult to measure. How does one measure "valuable, contributing member of society"? How does one measure "meaningful career as a professional accountant"?
6. The role of auditors in attesting to reports on service efforts and accomplishments (SEA) can be similar to that in expressing an opinion on traditional financial statements. If the SEA data can be measured and reported upon, auditors can verify the measurements. Auditors can be involved not only in verifying the data, but also in evaluating the quality of the internal control system used to collect the SEA data. Auditors are trained in evaluative techniques that transcend the underlying data. We tend to think of auditors as auditors of financial statements, but they can audit almost anything if there are objective standards against which to measure. As SEA data becomes more available, citizens will want the same level of credibility attached to the SEA data as is currently attached to financial statements that are attested to by a professional.
7. Performance budgets explicitly relate expenditures to operational objectives. Program budgets, the most common type of performance budgets, allocate funds by programs rather than by objects. Programs are composed of activities that are directed toward a common goal. Zero-base budgeting (priority-based budgeting) is a type of program budget.
8. Relates expenditures to objectives.
9. Encourages explicit consideration both of alternative means of achieving the same objective and of whether the objective even needs to be achieved.
10. Promotes analysis of the behavior of costs and discourages funding at levels other than those that will result in actual increases in results.
11. Invites periodic review of all programs and activities to assure that they are consistent with the entity's current objectives.
12. May provoke conflict over organizational objectives.
13. Encourages governing boards to establish and make known their funding priorities.
14. Links dollar expenditures with anticipated outcomes.
15. May be prepared conscientiously in the first year and perfunctorily thereafter.
16. May be imposed from above and resented by the entity.
17. May require adjustments to the computer system to capture the data.
18. May present managers with an overwhelming amount of data.
19. May not live up to its expectations.
20. Decision-makers may ignore rankings made by program officials.

4. [Note: Students will provide a variety of answers to this question. However, the key elements of any zero-base budget decision package should include:]

1. A statement of the activity’s objectives;
2. The consequences of not performing the activity;
3. Alternative means of accomplishing the same objective;
4. Expected inputs, outputs and outcomes at various levels of funding.