Reference no: EM133253945

St. Luke's Homeless Shelter is located in the heart of Savannah, and has been operating for over a decade. The shelter provides three service lines. In addition to the overnight 50-bed hostel, it provides a hot meal program and a counseling program. It provides hot meals, shelter, and companionship to the homeless. The demand for its services is especially high in the winter, when temperatures sometimes drop to below freezing, and life "on the street" becomes unbearable.

SYSTEM CHANGES

In March, the shelter had hired a new administrator to help it become more efficient. A business school graduate with prior experience in manufacturing and service companies in the private sector, one of her first steps had been to introduce what he called "responsibility accounting." She had instituted a new budgeting system, along with the provision of quarterly cost reports to the shelter's department heads. (Previously, cost data had been presented to department heads only infrequently.)

The new administrator developed the annual budget for the current fiscal year based on an analysis of the prior three years' costs. Over those three years, all costs had increased annually, but the biggest increases occurred between the second and third year. She considered basing the budget on average costs over the three-years period, hoping that the changes would improve efficiency and lower costs accordingly. However, because of the large increase between years two and three she decided to base the current budget on last year's levels, minus five percent. She decided to measure activity by client nights, and to set the budget for pounds of laundry processed at last year's level, which was approximately equal to the volume of each of the past three years.

In this scenario, what is meant by responsibility center accounting and budgeting?

List one positive aspect of the manager's new plan and one negative aspect

a. What do you think of the new manager's strategy of basing this year's budget on a 5% reduction from last year's budget?

b. What type of budgeting technique does this sound like?