Oak City’s cost allocation and determination
Robert W. Ingram, W. Cameron Parsons and Walter A. Robbins1
Oak City is an interdisciplinary case that involves cost allocation and determination issues in a governmental setting. Ethical considerations related to the role of accountants as expert witnesses also are included in the case. The primary issue in this case (drawn from actual events) is the amount of cost associated with police and fire services that should be charged to businesses in an area adjacent to the city limits, referred to as its police jurisdiction. State law requires the city to provide these services and permits it to charge the incremental cost of providing these services to businesses in the jurisdiction. The definition and determination of incremental cost is highly subjective. City officials have been allocating a portion of total costs to the jurisdiction. A business owner sues the city, arguing that only variable costs are relevant.
Students take the role of expert witnesses who are required to analyze available information and to develop a position supporting either the plaintiff or the city. They are required to deal with an unstructured problem for which various positions can be argued. They must identify relevant information and organize this information effectively. The case also serves to alert students to the importance of professional judgment in accounting decisions for which little authoritative guidance is available.
Mike Johnson, finance director for Oak City, sits in his office, peering out the window. It is the middle of February, and he is pleased with the latest reports of the city’s financial condition. After a few years of tight budgets, the city is getting back on the right track. General fund revenues are larger than expected and expenditures are under control. The city continues to grow, as a recent summary of financial and demographic trends indicates (exhibit 1). This looks like it is going to be a good fiscal year.
Suddenly, the door to his office flies open and in stomps Bob Holman, city attorney. “Mike, you will not believe what has happened!” Bob exclaims. “The city has just been hit with a civil suit by Anita Smith, the owner of Smith’s Lumber Company. Her business became part of the city’s police jurisdiction in 1993 when we annexed all that expensive residential property on the river.
Robert W. Ingram and Walter A. Robbins are Professors at University of Alabama, and W. Cameron Parsons is an Attorney with Parsons & Sutton. We gratefully acknowledge comments of Tom Albright, Tom Howard and Bill Samson on earlier drafts of this case. The comments of the anonymous reviewers were very helpful in improving case requirements and in making the case easier to understand. This case is based on actual events. Names and amounts have been changed to preserve anonymity.
Colin Drury, Cost and Management Accounting – Oak City
Oak City: Financial and Demographic Trendsa
Revenues and Expenditures are in thousands and are for the General Fund. Area is in equal miles
“She claims the city has collected excessive business license fees from her and other...