Oak City Case

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Colin Drury, Cost and Management Accounting – Oak City

Oak City’s cost allocation and determination
Robert W. Ingram, W. Cameron Parsons and Walter A. Robbins1
Abstract
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.

1

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.

1

Colin Drury, Cost and Management Accounting – Oak City

EXHIBIT 1
Oak City: Financial and Demographic Trendsa
Expenditures
Year
Population Revenues
Total
Police
Fire
Area Businesses
1985
61,212
$13,087 $13,082
$6,083
$4,744
57.5
421
1986
62,448
14,736
14,698
6,259
4,898
58.3
462
1987
65,330
15,011
14,956
6,407
5,033
60.0
488
1988
68,206
15,200
15,209
6,518
5,181
61.3
495
1989
69,455
16,102
16,083
6,840
5,526
62.1
513
1990
73,524
16,843
16,855
7,280
5,720
66.4
544
1991
76,409
17,622
17,596
7,506
5,996
66.8
569
1992
83,059
18,705
18,670
7,981
6,304
67.6
608
1993
85,922
18,987
19,194
8,312
6,408
68.2
612
1994
92,076
20,345
20,752
8,936
6,942
75.0
647
1995
96,549
22,315
22,301
9,734
7,425
76.2
655
1996
102,335
24,440
23,811
10,455
7,724
76.4
658
a
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...
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