Chapter 10 – Strategy and the Master Budget
Sales of motor homes have started to slow in recent months, partly because of high fuel prices. Motor-
home retail sales fell about 21% to 7,328 units in the first two months of this year, compared with the
same period a year ago, as RV buyers delay purchases or opt for towable trailer models.
To attract buyers, manufacturers and dealers are rolling out a host of discounts. This summer Thor
Industries says several of its brands will be offering gas cards to attract buyers. Terry’s RV Center in
Frankfort, Ill., rolled out a loyalty program for customers that allows them to redeem points earned on
service and parts for perks like free RV washes. Lazydays, an RV dealer in Seffner, Fla., where the
Humphries bought their coach, just launched a membership club for owners called Club Lazydays that
provides benefits like breakfast and lunch when customers are on the premises for repairs and 30%
discounts off area attractions.
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Chapter 10 – Strategy and the Master Budget
Case 10-3: Building Processes for a Solid Financial Foundation—The Case of
Community Health Initiatives 2
(Source: Sandra Richtermeyer, Strategic Finance, August 2007, pp. 52-57. Note: this case was the case
used as the 2008 IMA Student Case Competition. The Student Case Competition is sponsored annually by
the IMA to provide an opportunity for students to interpret, analyze, evaluate, synthesize, and
communicate a solution to a management accounting problem.)
Overall Case Objectives
1. Primary objective: developing accounting processes to provide decision makers with information useful
for decision support, planning and control.
2. Secondary objective: create a professional development plan for an early career management accountant.
General Context of Case
This case gives students an opportunity to develop and plan accounting processes for an early career accounting
professional (Stephanie) who is making a career transition from auditor (external role) to management
accountant (internal role) in the setting of a nonprofit organization. The case also presents a scenario where
students can learn more about the benefits of the Institute of Management Accountants (IMA) by integrating
Certified Management Accounting (CMA) certification and professional development into the recommendations for
the case.
CASE REQUIREMENTS
Develop a plan for Stephanie to follow over the next three months as she develops accounting processes
that will provide the CHI leadership (executive director and board of directors) with the right type of
information designed to be useful for decision support, planning, and control. In preparing your answer,
you may want to consider some of the specific questions/issues from the case:
How can CHI adopt an effective budget process?
How can CHI demonstrate that their organizational strategy links to their financial information?
How can benchmarking be useful for CHI?
How can Stephanie manage her work relationship with the board of directors and executive
director and evaluate her progress during her first three months on the job?
How can Stephanie develop herself professionally to be prepared for her new challenges at work
High-Level Snapshot of Possible Approaches to Case
Summary of possible recommendations related to primary objective: developing accounting
processes to provide decision makers with information useful for decision support, planning and
control. (See subsequent discussion for more detail and suggestions for each of the points listed
below.)
Develop more formal budget procedures and guidelines.
Determine the fias is” and the fito be” in terms of financial reporting
Develop procedures to monitor metrics and key measures of performance.
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Chapter 10 – Strategy and the Master Budget
Develop benchmarking procedures and educate decision makers on items that may be considered
by charity monitoring organizations.
Summary of possible recommendations related to secondary objective: create a professional
development plan for an early career management accountant. (See discussion below for more detail and
suggestions for each of the points listed below.)
Management accountant (Stephanie) needs to obtain more education on the types of financial
information frequently requested by boards.
Management accountant (Stephanie) develops a plan for her own continued education and
professional development. Possible solutions include CMA certification, CPE courses, IMA
chapter programs, networking with finance directors from similar nonprofits.
Develop more formal budget procedures and guidelines–possible steps:
Assess the current budgeting style – frequent changes, lack of adherence, limited usability as a
planning and control tool.
Describe the types of notes/disclosure about assumptions that may accompany the budget
Require adopted budget procedures to be in place before the beginning of the fiscal year (the case
time frame is four months into the year).
The budget reporting practices (Table 2) do not provide a format that is useful to compare specific
program budgets. For example, the expenses are not allocated to the programs.
Determine the fias is” and the fito be” in terms of financial reporting
Students should become familiar with the basic nonprofit financial statements prepared under GAAP
(released by the auditor) because that is the best assessment of the fias is” reports. The focus of GAAP-
based audited financial statements for a nonprofit centers on reporting assets, liabilities and net assets
with an emphasis on revenues, expenditures and excess/surplus. A possible solution may compare
components of audited financial statements to reports that are more oriented to specific decisions (such as
program decisions) or that are more fiuser friendly.” The fito be” statements may incorporate balanced
scorecard, benchmarking reports, reports that illustrate program results, etc.
Develop procedures to monitor metrics and key measures of performance.
Consider the use of a balanced scorecard (BSC). Develop a sample scorecard linked to the
strategy of the organization.
Develop a plan to implement the scorecard that includes board training, review and technology
enablement.
Link the scorecard to incentives for board, employees, program managers, etc.
Each program could have its own scorecard or there could be an overall organizational scorecard.
Examples of sample metrics for some programs are presented below (best list of metrics for
scorecard is provided in Table 3 of case):
Program: Relief-Travel and Housing Grant Program (sample metrics)
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Chapter 10 – Strategy and the Master Budget
Number of constituents served in program – metric = flat number or growth rating
Volunteer management – # new volunteers in program or volunteer retention ratio
Volunteer satisfaction ratings – use results of volunteer satisfaction survey
Volunteer assessment ratings – use results of volunteer assessment form
Program: Moving from Dependency to Independency (sample metrics)
Volunteer satisfaction survey results
Constituent success ratings
Level of in-kind services received
Establish Methods of Monitoring Risk Factors
Start by assessing the risk factors listed in Table 4 of case. Students may introduce solutions linked to the
COSO Enterprise Risk Management (ERM) framework. List examples of each type of risk and discuss
with the board. Once the board agrees upon risk factors, determine the best way to monitor the risk and
report back to the board.
External Risk Factors (see Table 4)
Natural environment–protection of assets (including information) from natural disasters, etc. May
include assessment of program sites where constituents and volunteers are present.
Political–new laws and regulations that could affect the nonprofit’s ability to obtain funding or maintain
exempt status. This risk factor is particularly important to consider if the organization relies on
governmental grants.
Social–changing demographics, social mores, family structures and work/life priorities that can affect
programs and contribution revenues.
Technological–ability to use emerging technology to deliver value to constituents of nonprofit. Data
security related to information maintained on employees, constituents, volunteers, donors, etc.
**An external risk factor not mentioned in case: economic–threats to funding sources. Note this is
included in COSO framework and may be mentioned in student solutions.
Internal Risk Factors (see Table 4)
Infrastructure–inadequate access to resources or poor allocation of resources
Personnel–obtaining employees with the right skill sets and capabilities; ethics codes, workplace
incidents (or volunteer site incidents), health and safety concerns, etc.
Process–process changes without adequate documentation, ineffective processes, poor supply chain
management (from constituent needs to volunteers, to in-kind resources)
Technology–insufficient capacity to handle IT needs, security breaches, inadequate data integrity, poorly
maintained systems.
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Chapter 10 – Strategy and the Master Budget
Develop benchmarking procedures: Educate decision makers on items that
may be considered by charity-monitoring organizations
How can benchmarking be useful for CHI?
The advantage of benchmarking is to give management and board of directors a basis on which to
compare their performance. Benchmarking with other nonprofits can be particularly useful. CHI can
benchmark with other nonprofits that have:
A similar mission and a comparable financial position (use percentages rather than dollars for
implementing benchmarking practices.
Note to instructors: All metrics in Table 3 of CHI case are suitable metrics for
benchmarking and students should incorporate those into their solution.
Steps in Developing Benchmarking Practices
1. How do you obtain data from similar nonprofit organizations? Locate similar nonprofit
organizations that can be compared on several dimensions such as size (revenues, budget, assets,
number of employees, etc.), mission and location. Useful and relevant financial information on
exempt entities can be found on Form 990, Return of Organizations Exempt from Income Tax,
audited financial statements and information reported by charity monitoring organizations.
Financial information reported on Form 990 as well as some supplemental data on tax-exempt
organizations can be found easily on Guidestar.org, a national database of nonprofit
2. Review financial metrics of comparable organizations. This allows financial professionals at
nonprofit organizations to have a working knowledge of what should be included on their firadar
screen”. Obtaining an understanding of key performance measures used by nonprofit
Program expense ratio = total expenses spent on the organizational mission divided by total
organizational expenses. In general, many charity watchdog organizations suggest that this ratio
should be 60-65% or higher, depending on the mission.
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Chapter 10 – Strategy and the Master Budget
25% or more are appropriate. It is important that they document their source.
Revenue growth = the percentage change in annual revenues. This indicator helps assess whether
or not a nonprofit organization maintains or grows the resources used to carry out the
organizational mission. The ratios described above should be consistent or improve as revenue
grows.
Net asset levels = the amount of unrestricted net assets. Many charity monitoring organizations
suggest that this amount should be less than or equivalent to three times the annual budget.
3. Review compensation and benefits paid by comparable organizations.Obtaining and
documenting compensation levels of employees in similar organizations may be useful as salaries
can be a key expense for the nonprofit. Salary information can be obtained from salary surveys
targeted specifically at nonprofit organizations. In addition, Part V and Schedule A of Form 990
4. Develop a relationship with finance professionals at a similar nonprofit (similar based on a
few key dimensions such as mission, budget size, organizational structure, etc.). This can help
Secondary Objectives of Case–link to professional development and
certification (CMA) issues
Stephanie needs to update herself on how boards the types of financial information
frequently requested by boards.
Case responses may include links to external resources such as Board Source or any nonprofit
organization dedicated to serving boards. Professional development courses on nonprofit issues may also
be helpful.
1The National Council of Nonprofit Associations provides links to many state-sponsored salary surveys.
www.ncna.org .
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Chapter 10 – Strategy and the Master Budget
Stephanie should develop a plan for her own continued education and professional
development.
This question provides an opportunity for students to integrate the importance of professional
development, certification and networking with other professionals into their solution. This question links
to the primary goals of IMA and gives the students an opportunity to link the mission of the organization
into their responses.
Possible solutions include CMA certification, CPE courses, IMA chapter programs, networking with
professional education courses, etc.
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Chapter 10 – Strategy and the Master Budget
10-4: Academic Advising at Bay State
(Source: Janice E. Bell and Shahid L. Ansari, Strategic Finance, September 2008, pp. 44-51. Note: this case was the
case used as the 2009 IMA Student Case Competition. The Student Case Competition is sponsored annually by the
IMA to provide an opportunity for students to interpret, analyze, evaluate, synthesize, and communicate a solution to
a management accounting problem.)
Case Requirements
1. What activities does the advising department perform?
2. How does the department spend its resources on these activities?
3. Why is COBAA’s performance poor relative to benchmarks?
4. How can COBAA improve Bay State’s performance regarding credit hours at graduation, FTF time to
graduation, and student satisfaction with advising?
Rice would also like the task force to make a budget recommendation for the 2008 academic year, with
specific suggestions about how to cut recurring operating costs by 15% while achieving the unit’s
mission.
COBAA’s base budget request for 2008 is provided in Table 7. Table 8 contains details of the COB’s
advising activities that the advising staff put together for further analysis, and Table 9 contains the
performance evaluations of the individual activities, where available.
In addition to the base budget request in Table 7, COB’s advising manager is requesting that your task
force also recommend an increase in the base budget to cover the following items:
1. The hiring of an ombudsman to take students’ complaints and assist students in resolving their issues.
The primary focus would be on lost paperwork, failure to meet deadlines for adding and dropping classes,
ability to maintain financial aid with unit reductions, help in arranging makeup work for missed classes,
and finding space in open classes. The recurring cost of this activity would be approximately $67,000,
which includes salary, benefits, and office expenses for another employee.
2. The development of glossy brochures for each option and major to be distributed to high school and
community college students to assist outreach activities. These brochures should cost approximately
$75,000 in the upcoming year to develop and print; afterwards, the annual cost should be between
$25,000 and $30,000 to replenish stock.
3. Expansion of A1 activities by 25% to include group sessions on the substitution and waiver process.
This should benefit all students who are cross-enrolled in another university, attending a study abroad
program, or have transferred. This cost could be partially offset by eliminating the review of special
4. Coordinate with the Internship office to have firms offering internships attend the career fair with
information about internship positions. This would create additional event costs of approximately
$15,000. Students would benefit from the additional service.
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Chapter 10 – Strategy and the Master Budget
CASE TEACHING NOTES: ACADEMIC ADVISING AT BAY STATE
Background
Bay State, located in a major metropolitan area, is part of a five-campus public, state university system
established by the state legislature to provide the opportunity for a low-cost college degree to state
residents who graduate in the top 20% of their class. The university has an enrollment of approximately
39,000 full- and part-time students, equating to 28,000 full-time equivalent (FTE) students. Bay State’s
performance has declined in recent years, and upper management has charged its president to improve
performance while reducing overall spending by 15%. The president believes that the advising function is
partially responsible for the declining performance and wants help understanding advising activities and
creating a budget for next year.
This case is based loosely on over 40 years of experience with a state university system. The name and
size of the state system, metrics, and financial data have been changed, but the scenario describes some of
the actual conditions that existed in one advising operation.
This case is vague about the nature of the student analysis required. Students may approach the case with
some or all of the tools that are suggested, or they may use other analysis. Regardless of the tools that
students use for analysis purposes, it is important they move beyond technical analysis. Students should
approach the case from a strategic cost management perspective and make recommendations that focus
on the mission of advising. Appropriate student recommendations should address improving performance
on metrics monitored by the state legislature. Recommendations should be based on data and analysis, not
just figut” feelings.
The objectives of this case are:
1. To understand the importance of taking fia customer’s perspective” when analyzing operations.
(This case is particularly well-suited to accomplish this goal since students are the customers of
university advising and have very strong feelings about it.)
2. To have students analyze operations using many of the tools presented in a typical managerial
accounting class (activity-based costing, benchmarking, balanced scorecard, budgeting, etc.)
3. To have students integrate results from the various types of accounting analyses they perform
when making recommendations about the budget and operations.
4. To reinforce:
a. The difficulty of using benchmark data.
b. The need to allocate common resources to activities.
c. The necessity of understanding the strategic linkage between activities and performance goals.
d. The imprecise nature of budgeting given accounting analysis and political reality.
5. To underscore the importance of good judgment when there is no single correct solution based on
one perfect analysis of facts.
When teaching this case, we suggest that you cover the case over two 90-minute class periods. The first
class period should cover Bay State’s mission & key facts, the identification of issues and problems, the
selection of analysis students think relevant, performing activity costing for COBAA, and creating a
report that benchmarks their activities. In the second class period, we suggest that students review
COBAA’s mission and create a strategy map linking its activities to results. Then lead students through an
evaluation of activities performed, discussing whether they should be continued, improved, or dropped.
This should ultimately lead to the creation of a budget for the upcoming year and perhaps a balanced
scorecard (BSC) for the advising function.
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Mission & Key Facts about Bay State
To appreciate the role of advising at Bay State, it’s helpful to consider the mission of the state university
system and the performance metrics that the state legislature monitors. The mission of the state university
system is to provide educational opportunity to students who graduate in the top 20% of their public high
schools. Tuition is kept quite low; the state pays approximately 80% of the cost of education while
students pay only 20%. To measure performance, the state monitors the statistics shown in Table 1 of the
case.
While little is known about the other universities in the system, Bay State’s performance lags its sister
institutions, and it appears to have a performance problem. It has lower average GPA and SAT scores, a
lower retention rate (probably resulting from lower GPA and SAT scores), the longest time to graduation,
and the highest average units taken.
Bay State is the second largest university in the system (based on FTEs). We don’t know its rank in terms
of student headcount; it could be that Bay State, located in a major metropolitan area, has a greater mix of
part-time students than its sister institutions and has the highest headcount in the system. That would
certainly be a mitigating factor causing longer time to graduation. It’s unclear from the case that the mix
of part-/full-time students is considered by the state when evaluating performance. This is, of course, very
important when evaluating Bay State’s results. While students shouldn’t be allowed to excuse Bay State’s
results, it’s important for them to notice that some results may be a consequence of the particular mix of
students at Bay State.
Bay State also has the highest percent of class capacity utilized. The state monitors utilization to evaluate
requests for new buildings. The average student at Bay States takes 147 units when 124 are needed for
graduation. That means Bay State students take about 20% more units than necessary, which causes
greater capacity utilization. While Bay State administrators probably think Bay State is at maximum
capacity and should be first on the state’s list for new buildings, more capacity would be available if
students graduated with the correct number of units.
What is the Issue or Problem facing Bay State?
Based on the data presented in Table 1, Brenda Rice, university president, has identified a performance
problem at Bay State. Given that the mission of academic advising is to assist students with degree
requirement so they reach their educational goals in the most efficient and timely manner, it’s clear why
Rice wants to focus on improving advising operations. From the state’s perspective, efficiency means
taking the proper 124 units to graduate (no more or less) and then graduating from a four-year institution
in as close to four years as feasible. These goals make space available so students in the top 20% of their
graduating classes have an opportunity to attend the university. Rice needs to improve Bay State’s
performance in these two crucial areas and expects improvements in advising operations to lead to
performance improvements.
What analysis do you need to perform?
Rice has requested specific information from the task force:
1. What activities does the advising department undertake?
2. How does COBAA spend its resources on these activities?
3. Why is COBAA’s performance poor relative to benchmarks?
4. How can COBAA improve the college’s performance on units at graduation, first-time freshmen
(FTF) time to graduation, and student satisfaction with advising?