Food on Wheels is a charitable organisation that provides meals for low-income individuals who are unable to leave their homes. To support its services, the organisation solicits contributions from individuals and businesses. Food on Wheels needs to submit financial statements to its major sponsor.

The sponsor requires expenses to be assigned to the following cost pools: administrative, fundraising and programs.

The bookkeeper for Food on Wheels is a volunteer who is taking accounting classes at the local community college. He knows that all of the costs to prepare and deliver meals should be assigned to the program. However, he is not sure how to assign some of the costs. In particular, he is concerned about the following two items.

Costs for printing and mailing a monthly newsletter

The newsletter is sent out to donors and clients and asks for donations. It also describes the organisation’s activities, provides information for obtaining meal services, and provides recipes for some of the meals that are served. The director of the organisation wants the cost of the newsletter to be classified as a program cost. She maintains that the program information and recipes should be considered educational material. Not-for-profit organisations typically classify educational materials as program expenses.

Director’s salary and benefits

The director of Food on Wheels spends much of her time raising funds, meeting with the board of directors and performing other administrative duties. She also manages the cooks and drivers, purchases food and delivery supplies, and schedules the food deliveries. The director has instructed the bookkeeper to allocate her salary and benefit costs as follows: 50 per cent to the program, 25 per cent to fundraising and 25 per cent to administration.

Required

(a) Identify and discuss uncertainties about how each of the following costs should be classified.

(i) Costs to print and mail the newsletter

(ii) Director’s salary and benefits

(b) Does this situation involve an ethical dilemma for the bookkeeper? Why?

(c) Explain why the director prefers costs to be assigned to program expenses.

(d) Explain how you think sponsors would prefer the costs in part (a) to be assigned.

(e) Suppose you are reviewing cost information for another organisation. Would you expect the organisation’s program costs to be biased upward, biased downward, or to be unbiased? Explain.

(f) How would you classify the costs in part (a) if you were the bookkeeper for Food on Wheels? Explain your reasoning.