How can I jump, when I have no place to stand? Accounting to meet the needs of a changing market.

Sale, Martha Lair

CASE DESCRIPTION

This case, based on the Fleming-Mason Energy electric cooperative, is the result of the personal experience and commitment of Mr. David E. Smart who at the time of the case was employed with Fleming-Mason Energy as Engineering Superintendent. The case is set when the company must examine the costs of providing "unbundled" individual services due to competition brought about by deregulation. It leads the student to examine the activities necessary to provide the services offered by the company and possible Activity Based Cost pools into which the costs of these activities might be grouped. It also asks the student to consider the competitive impact of deregulation and formulate an analysis of the strengths and weaknesses of the company to assess the possibility that the company will not be able to provide all its current services at a competitive cost once consumers are able to pick and choose service providers. The case is appropriate for students at any level who have completed an introduction to Activity Based Costing. Students with a deeper knowledge of costing will be able to do a more in-depth analysis. The case can be covered in a single fifty-minute class for use in an undergraduate class, or it may be analyzed in enough detail to occupy twice that time in an advanced management accounting or masters level class. The solution should take no more than ninety minutes of outside preparation by the student.

CASE SYNOPSIS

The primary focus of this case is the development of Activity Based Costing (ABC) cost pools. The company upon which the case is based is facing heightened competition due to deregulation. Traditionally, the company's services have been priced on a cost basis calculated on the overall cost of providing the complete bundle of services offered. Due to deregulation, customers will be allowed the opportunity to choose other providers for individual services based on the cost of these services. Management plans to use ABC as a tool to determine more accurate costs of the various services they offer and help determine the areas in which the company can be most competitive. A secondary focus of the case is the development of a SWOT analysis.

INSTRUCTORS' NOTES

1. In as much detail as possible given the information provided, make a list of services that are likely provided by Fleming-Mason Energy. See response to Question 2, below.

2. What are the activities that Fleming-Mason Energy is likely to perform in providing these services?

In response to the first two questions, students will undoubtedly imagine a wide range of specific services and a variety of activities necessary to perform these services, however, the text of the case provides enough detail that students should be able to identify a number of services and activities. The following table provides an example that is neither exhaustive nor is it intended to represent a minimum response.

3. What are the cost pools to which you would suggest these actives be assigned?

In answering the third question, students will likely observe that certain activities such as engineering are common to more than one service. They should be able to identify pools such as: engineering, purchasing, accounts payable, power demand forecasting, power acquisition, real property acquisition, real property maintenance, personnel, billing and accounts collectable, plant asset planning and acquisition, plant asset maintenance, and marketing. In the United States most ABC systems use a limited number of pools. The specific number of cost pools and whether activities are grouped together into fewer pools or accounted for in more detail is a function of the detail identified in the first two questions.

4. Are these cost pools sufficiently detailed to provide information for unbundled billing? What additional information do you think will be necessary to provide this type of billing? Choose one of the cost pools identified above and show how the cost collected in that cost pool could be traced to specific services. It may be helpful to use assumed amounts and demonstrate the process.

In response to the fourth question, students will be able to conclude that it is possible to pool like activities across services as long as they provide the level of detail necessary to meet the billing requirements of unbundled billing. To provide the necessary detail the billing must be subdivided by individual service. To accomplish this task the activities must be logically and equitably identified with the different services they support. Following this process helps students understand the difference between ABC and traditional volume-based costing and helps them identify how ABC is superior. It should be come apparent to them that there are a number of costs associated with an activity and that these costs can be passed along to the service based on the level of usage of the activity. To complete this question, they might choose some activity such as Engineering that had been identified as appropriate for a separate cost pool. They would then list the costs of providing an Engineering Department. These costs should include the cost of engineer's salaries and benefits, the cost of the office space in which they work, and the cost of the supplies they use. A very detailed student response, from students who have a good background in costing, might include assigned cost from other pools like personnel and utilities. Depending on the knowledge level of the students and the goals of the instructor, this could even be expanded into a discussion of joint cost allocation and the different joint allocation methods. This is one area where the solution one would expect of lower-level students and the response one would expect of those in an advanced class might be considerably different. A response using assumed simplified numbers is presented below.

5. What is Fleming-Mason Energy's strategy?

Fleming-Mason Energy, like all electric cooperatives, serves a restricted area and is likely to follow a focus strategy. Students may be encouraged to do some additional research on the original purpose of the REA and conclude that the quality of service is historically more important to these owner/customers than is price. However, with deregulation, and the increased population in many of the areas served by electric cooperatives, competing on price will become necessary. If students are encouraged to obtain additional information, the following web sites are helpful.

http://www.usda.gov./rus/electric/index.htm http://www.fmenergy.net/ http://v001u22was.maximumasp.com/kaec/default.htm

6. What services do you think are core to this strategy?

In response to the sixth questions, it is not unreasonable to conclude that Fleming-Mason Energy will stress its position as a customer owned entity and its long history of service spanning a time when larger for-profit providers were unwilling to provide service to rural areas. This strategy will necessitate that Fleming-Mason Energy identify those services the members identify as characteristic of the customer/company relationship and continue to control those services. Distribution and outage response and restoration are likely the two services most central to this relationship.

7. Are other services provided by Fleming-Mason Energy that are not core to their strategy that they might consider outsourcing?

See response to Question 8, below.

8. What are some of the considerations that they should examine when making outsourcing decisions?

All areas not identified as core services in Question 6 might be considered for outsourcing in response to the seventh question. However, students should realize that careful consideration must be given to the cost, quality, and reliability of these services as provided by others versus the cost, quality, and reliability as provided by Fleming-Mason Energy. An appropriate discussion here would include the danger of relying on an outside supplier who might provide the services at a lower cost until Fleming-Mason Energy lost the capacity to supply the service then raise the price to force Fleming-Mason Energy to pay more or reinvest in capacity.

Additional information is available on this company from the website (http://www.fmenergy.net/) listed above. I have also included a set of the most recent publicly available financial statements for Mason-Fleming Energy. These statements are not essential to arriving at a satisfactory solution to the case, but the instructor may wish to incorporate the information into a longer or more detailed discussion of the case.

Martha Lair Sale, Sam Houston State University

Table 1: Services Provided by Mason-fleming

SERVICE ACTIVITIES

Line Construction Engineering and planning
 Obtain right-of way
 Purchasing
 Construction

Substation Construction Obtain site
 Engineering and planning
 Purchasing
 Construction

Line Maintenance Clearing right-of way
 Replacing poles
 Replacing lines
 Engineering and planning

Substation Maintenance Cleaning and clearing site
 Replacing/ maintaining equipment
 Engineering and planning

Power Purchasing Project need
 Contract negotiation

Power Distribution Transformation
 Metering
 Billing
 Collections

Outage Response and Monitoring
Restoration Activation of response team
 Travel to and from site
 Repair

Marketing Planning
 Artistic control
 Media purchases
 Effectiveness assessment

Table 2: MASON FLEMING BALANCE SHEET 1/1/2003 Part 1 Assets and
Other Debits

Item Balance Beginning of Year

UTILITY PLANT
Utility Plant $54,946,616.00
Less: Accumulated Provision for
Depreciation and Amortization $13,823,066.00
Net Utility Plant $41,123,550.00

OTHER PROPERTY AND INVESTMENTS
Investments in Assoc. Organizations $10,086,084.00
Other Investments $27,886.00
Total Other Property and Investments $10,113,970.00
Cash-General $396,812.00
Working Funds $935.00
Consumer Accounts Receivable $4,202,767.00
Other Accounts Receivable $827,870.00
Accumulated Provision for Uncollectable $139,109.00
Receivables -Cr
Materials and Supplies-Electric $253,840.00
Prepayments $222,442.00
Interest and Dividends Receivable $6,920.00
Total Current and Accrued Assets $5,772,477.00

DEFERRED DEBITS
Preliminary Survey and Investigation Charges $37,000.00
Miscellaneous Deferred Debits $10,156.00
Total Deferred Debits $47,156.00
TOTAL ASSETS AND OTHER DEBITS $57,057,153.00

Item Balance End of Year

UTILITY PLANT
Utility Plant $57,968,083.00
Less: Accumulated Provision for
Depreciation and Amortization $15,016,287.00
Net Utility Plant $42,951,796.00

OTHER PROPERTY AND INVESTMENTS
Investments in Assoc. Organizations $,1309,1134.00
Other Investments $41,403.00
Total Other Property and Investments $13,132,537.00
Cash-General $509,923.00
Working Funds $890.00
Consumer Accounts Receivable $4,308,119.00
Other Accounts Receivable $2,778,336.00
Accumulated Provision for Uncollectable $53,224.00
Receivables -Cr
Materials and Supplies-Electric $232,217.00
Prepayments $206,276.00
Interest and Dividends Receivable $6,922.00
Total Current and Accrued Assets $7,989,459.00

DEFERRED DEBITS
Preliminary Survey and Investigation Charges $27,750.00
Miscellaneous Deferred Debits
Total Deferred Debits $27,750.00
TOTAL ASSETS AND OTHER DEBITS $64,101,542.00

Table 3: MASON FLEMING BALANCE SHEET 1/1/2003 Part 2 Liabilities
and Other Credits

EQUITIES AND MARGINS

Memberships $212,964.00
Patronage Capitol $17,572,575.00
Donated Capital $17,369.00
Other Margins and Equities $3,312,249.00
Total Equities and Margins $21,115,157.00

LONG TERM DEBT
Long-Term Debt-REA Construction - Net $10,024,356.00
Long-Term Debt-CFC Construction - Net $4,549,229.00
Other Long-Term Debt $11,784,810.00
Total Long Term Debt $26,358,395.00
Accumulated Operating Provisions $1,197,474.00

CURRENT AND ACCRUED LIABILITIES
Notes Payable $3,366,693.00
Accounts Payable $3,521,375.00
Consumers Deposits $594,078.00
Taxes Accrued $32,140.00
Interest Accrued $44,083.00
Tax Collections Payable $4,781.00
Misc. Current and Accrued Liabilities $803,138.00
Total Current and Accrued Liabilities $8,366,288.00

DEFERRED CREDITS
Consumer Adv. for Construction $15,326.00
Consumers Energy Prepayments $,5440.00
Other Deferred Credits ($927.00)
Total Deferred Credits $19,839.00

TOTAL LIABILITIES AND OTHER CREDITS $57,057,153.00

EQUITIES AND MARGINS

Memberships $216,734.00

Patronage Capitol $20,808,489.00
Donated Capital $18,696.00
Other Margins and Equities $2,547,207.00
Total Equities and Margins $23,591,126.00

LONG TERM DEBT
Long-Term Debt-REA Construction - Net $9,622,299.00
Long-Term Debt-CFC Construction - Net $4,389,726.00
Other Long-Term Debt $17,300,916.00
Total Long Term Debt $31,312,941.00
Accumulated Operating Provisions $1,359,898.00

CURRENT AND ACCRUED LIABILITIES
Notes Payable $2,333,593.00
Accounts Payable $3,910,894.00
Consumers Deposits $582,600.00
Taxes Accrued $14,933.00
Interest Accrued $37,894.00
Tax Collections Payable $4,887.00
Misc. Current and Accrued Liabilities $953,284.00
Total Current and Accrued Liabilities $7,838,085.00

DEFERRED CREDITS
Consumer Adv. for Construction $13,844.00
Consumers Energy Prepayments $4,633.00
Other Deferred Credits ($18,985.00)
Total Deferred Credits ($508.00)

TOTAL LIABILITIES AND OTHER CREDITS $64,101,542.00

Table 4: SCHEDULE OF ELECTRIC PLANT ASSETS IN SERVICE

Item Depreciation Balance
 Rate Beginning of Year

INTANGIBLE PLANT
Misc. Intangible Plant 3.07 $15,634.00

Total Intangible Plant $15,634.00

DISTRIBUTION PLANT
Poles Towers and 3.96 $21,014,407.00
Fixtures

Overhead Conduit and 2.87 $12,354,162.00
Devices

Underground Conduit 3.14 $691,390.00
& Devices

Line transformers 3.60 $10,953,593.00

Services 3.80 $3,410,363.00

Meters 4.78 $1,932,797.00

Installed on Customer 3.42 $928,250.00
Premises

Total Distribution Plant $51,284,962.00

GENERAL PLANT
Land and Land Rights $21,979.00

Structures and 2.50 $718,025.00
Improvements

Office Furniture and 6.00 $454,534.00
Equip

Transportation VARIOUS $1,419,064.00
Equipment

Stores equipment 4.50 $25,391.00

Tools Shop and Garage 5.00 $152,021.00
Equip

Laboratory Equipment 4.00 $51,609.00

Power Operated Equip 16.00 $20,922.00

Communication Equip 5.00 $94,396.00

Miscellaneous Equip 4.00 $42,235.00

Total General Plant $3,000,176.00

TOTAL ELECTRIC
PLANT IN SERVICE $54,300,772.00

Item Additions Retirements

INTANGIBLE PLANT
Misc. Intangible Plant

Total Intangible Plant

DISTRIBUTION PLANT
Poles Towers and $967,268.00 $230,035.00
Fixtures

Overhead Conduit and $717,796.00 98,847
Devices

Underground Conduit $31,002.00 270
& Devices

Line transformers $691,692.00 $298,140.00

Services $256,294.00 $17,210.00

Meters $209,364.00 $58,813.00

Installed on Customer $63,313.00 $4,982.00
Premises

Total Distribution Plant $2,936,729.00 $708,297.00

GENERAL PLANT
Land and Land Rights

Structures and $11,000.00 $8,445.00
Improvements

Office Furniture and $36,392.00 $11,937.00
Equip

Transportation $178,658.00 $105,580.00
Equipment

Stores equipment

Tools Shop and Garage $28,512.00 $15,174.00
Equip

Laboratory Equipment

Power Operated Equip

Communication Equip $48,116.00 $67,312.00

Miscellaneous Equip $1,663.00 $292.00

Total General Plant $304,341.00 $208,740.00

TOTAL ELECTRIC
PLANT IN SERVICE $3,241,070.00 $917,037.00

Item Balance End of Year

INTANGIBLE PLANT
Misc. Intangible Plant $15,634.00

Total Intangible Plant $15,634.00

DISTRIBUTION PLANT
Poles Towers and $21,751,639.00
Fixtures

Overhead Conduit and $12,973,111.00
Devices

Underground Conduit $722,122.00
& Devices

Line transformers $11,347,145.00

Services $3,649,448.00

Meters $2,083,347.00

Installed on Customer $986,581.00
Premises

Total Distribution Plant $53,513,394.00

GENERAL PLANT
Land and Land Rights $21,979.00

Structures and $720,580.00
Improvements

Office Furniture and $478,988.00
Equip

Transportation $1,492,142.00
Equipment

Stores equipment $25,390.00

Tools Shop and Garage $165,360.00
Equip

Laboratory Equipment $51,609.00

Power Operated Equip $20,922.00

Communication Equip $75,200.00

Miscellaneous Equip $43,606.00

Total General Plant $3,095,777.00

TOTAL ELECTRIC
PLANT IN SERVICE $56,624,805.00

Table 5: ACCUMULATED PROVISIONS FOR DEPRECIATION OF ELECTRIC PLANT
ASSETS IN SERVICE

Item Amount

Balance Beginning of Year $13,823,066.00
Depreciation Provisions for Year Charged To:
Depreciation Expenses $1,962,608.00
Transportation Expense-Clearing $160,526.00
Other Accounts (detail)
 Stores Expense - Clearing $1,028.00
Total Depreciation Provisions for Year $2,124,162.00
Credit Adjustments (describe)
 Reimbursements - Line Relocations $71,723.00
 Sale of Scrap Material $3,192.00
Total Credits for Year $74,915.00
Net Charges for Plant Retired
Book Cost of Plant Retired $917,037.00
Cost or Removal $115,766.00
Salvage (Credit) $1,834.00
Net Charges for Plant Retired: $1,030,969.00
Debit Adjustments (describe)
 Retirement Work in Progress ($25,113.00)
Total Debits for Year $1,005,856.00
Balance End of Year $15,016,287.00

Table 6: STATEMENT OF INCOME FOR THE YEAR

Item Avg. No. of
 Consumers
OPERATING REVENUES
Residential Sales
Rural 16,434
Seasonal 4,021
Towns and Villages 0
Total 20,455
Irrigation Sales 0

Commercial and Industrial Sales
Small 1,401
Large 5
Total 1,406
Public Street and Highway Lighting 3
Sales to Public Buildings and 258
Authorities

Sales for Resale 0
Total Sales of Electricity 22,122

OTHER OPERATING REVENUES
Forfeited Discounts
Miscellaneous Service Revenues
Rent From Electric Property
Other Electric Revenues
Total Other Operating Revenues
Total Electric Operating Revenues

OPERATING EXPENSES
Total Operation and Maintenance Expenses
Depreciation Expense
Amortization Expense
Taxes Other Than Income Taxes
Total Operating Expenses
Operating Income

OTHER DEDUCTIONS
Taxes Other Than Income Taxes - OTHER
Misc Income Deductions
Interest on Long Term Debt
CFC Non-Cash Dividend - Cr
Amortization of Debt Discount and Expense
Other Interest Charges
Total Other Deductions
Net Income From Electric Operations

OTHER INCOME
Revs. From Mdse. Jobbing and Ct. Work
Costs and Expenses of Mdse. Jobbing and Ct.
Work
Income From Non-Utility Operations
Nonoperating Rental Income
Interest and Dividend Income
Miscellaneous Nonoperating Income
G & T Coop Capital Credits
Other Capital Credits
Total Other Income 0
NET INCOME 0

Item Kilowatt Hrs. Sold

OPERATING REVENUES
Residential Sales
Rural 245,727,668
Seasonal 13,444,703
Towns and Villages 0
Total 259,172,371
Irrigation Sales 0

Commercial and Industrial Sales
Small 10,823,8065
Large 524,192,657
Total 632,430,722
Public Street and Highway Lighting 74,868
Sales to Public Buildings and 2,221,014
Authorities

Sales for Resale 0
Total Sales of Electricity 893,898,975

OTHER OPERATING REVENUES
Forfeited Discounts
Miscellaneous Service Revenues
Rent From Electric Property
Other Electric Revenues
Total Other Operating Revenues
Total Electric Operating Revenues

OPERATING EXPENSES
Total Operation and Maintenance Expenses
Depreciation Expense
Amortization Expense
Taxes Other Than Income Taxes
Total Operating Expenses
Operating Income

OTHER DEDUCTIONS
Taxes Other Than Income Taxes - OTHER
Misc Income Deductions
Interest on Long Term Debt
CFC Non-Cash Dividend - Cr
Amortization of Debt Discount and Expense
Other Interest Charges
Total Other Deductions
Net Income From Electric Operations

OTHER INCOME
Revs. From Mdse. Jobbing and Ct. Work
Costs and Expenses of Mdse. Jobbing and Ct.
Work
Income From Non-Utility Operations
Nonoperating Rental Income
Interest and Dividend Income
Miscellaneous Nonoperating Income
G & T Coop Capital Credits
Other Capital Credits
Total Other Income 0
NET INCOME 0

Item Amount

OPERATING REVENUES
Residential Sales
Rural $15,416,022.00
Seasonal $1,094,778.00
Towns and Villages $0.00
Total $16,510,800.00
Irrigation Sales $0.00

Commercial and Industrial Sales
Small $6,000,923.00
Large $18,947,175.00
Total $24,948,098.00
Public Street and Highway Lighting $7,992.00
Sales to Public Buildings and $154,153.00
Authorities

Sales for Resale $0.00
Total Sales of Electricity $41,621,043.00

OTHER OPERATING REVENUES
Forfeited Discounts $224,458.00
Miscellaneous Service Revenues $178,365.00
Rent From Electric Property $274,549.00
Other Electric Revenues $5,184.00
Total Other Operating Revenues $682,555.00
Total Electric Operating Revenues $42,303,598.00

Table 7: STATEMENT OF INCOME FOR THE YEAR (Continued)

OPERATING EXPENSES
Total Operation and Maintenance Expenses $38916210.00
Depreciation Expense $1962608.00
Amortization Expense $0.00
Taxes Other Than Income Taxes $42545.00
Total Operating Expenses $40921363.00
Operating Income $1382234.00

OTHER DEDUCTIONS
Taxes Other Than Income Taxes - OTHER $0.00
Misc Income Deductions $8949.00
Interest on Long Term Debt $802619.00
CFC Non-Cash Dividend - Cr $0.00
Amortization of Debt Discount and Expense $0.00
Other Interest Charges $112464.00
Total Other Deductions $924032.00
Net Income From Electric Operations $458202.00

OTHER INCOME
Revs. From Mdse. Jobbing and Ct. Work $16699.00
Costs and Expenses of Mdse. Jobbing and Ct. ($15578.00)
Work
Income From Non-Utility Operations $0.00
Nonoperating Rental Income $(173863.00)
Interest and Dividend Income $66,473.00
Miscellaneous Nonoperating Income $(26239.00)
G & T Coop Capital Credits $2265834.00
Other Capital Credits $30286.00
Total Other Income $2,163,612.00
NET INCOME $2,621,814.00

Engineering Department Cost

Salaries and Benefits $10,000
Work Space 6,000
Supplies 4,000
Total Cost $20,000

Percentage of Engineering time spent in each service and resulting
cost to that service:

Line Construction 45% ($20,000) =$9,000
Substation Construction 15% ($20,000) = 3,000
Line Maintenance 20% ($20,000) = 4,000
Substation Maintenance 20% ($20,000) = 4,000