Child Care Center Case Study: Org Based AAR Example

This blog is a continuation of the story started in the Fraudulent Managerial Costing blog. The illustration restates the report shown there in a manner that highlights issues and questions raised by the circled numbers.

First though, contrast the information communicated in this illustration compared to the original. The fonts are big enough to be easily readable. Unimportant data has been aggregated in “other.” All numbers are rounded to $K with one decimal point that makes it much easier for the reader to grasp and compare.

The child care center on a military installation actually has a more complex structure than most organization based entities. This is because it must keep two sets of books: one for appropriated funds (APF) and the other from non-appropriated (NAF). The appropriated funds are subsidies the Army supplies to the Center. The non-appropriated funds represent revenue paid by soldier families based on rank. NIBD is then a measure of profitability representing Net Income Before Depreciation.

A Word About Use of Brackets

Bracketed numbers represent unfavorable variances. This is to say that if actual results were worse than expected then the difference is an unfavorable variance. Some reports use the arithmetic difference between columns and use the minus sign.

However, this can be confusing to the user who must then interpret whether a minus sign indicates good or bad news. For example, cost going down is good news, but revenue or profit going down is bad news. Use of brackets to indicate the logical distinction between good and bad news is much better for the reader.

Variances Highlight Need for Understanding

The purpose of highlighting variances is to easily enable management by exception. The lack of a variance indicates that things probably went according to plan. Therefore both the presenter and reviewer can more efficiently use their time by focusing on areas with significant variation from expectation.

The first variance that caught the attention of the reviewers was the $12.1K favorable variance in appropriated cost. Even though this is good news it does need to be explained. If the spending levels can continue low perhaps there is an opportunity to move budget elsewhere. The presenter, however, had the answers and it developed that the favorability was explained by a new hire arriving later than planned and a delay in paying a onetime special charge.

No further action is needed.

The second area of concern was the December Revenue unfavorable variance of $16.2K. Since costs were close to expectation the operation lost significant profit in the month and profit was $16.3K unfavorable to expectation. This is a very large miss and the annual impact would be huge if there is a chronic problem and corrective action is not taken.

So the question was asked and the presenter replied, “Well, December has Christmas and a lot of families don’t send their children when they are home on holiday or leave.” The reviewer then asked if the plan assumed that there would be no Christmas this year.

It was at this point in the meeting that one of the senior leaders attending said, “I get it. I’m starting to see the value in the After Action Review.” Clearly the plan should have reflected anticipated lower attendance and revenue. Planning for the Christmas effect could have and should have led to thinking about reducing cost by temporarily reducing staffing, food purchases, overtime, etc.

A lesson was learned.

These disclosures then led to a discussion about why parents were not charged for daycare when they kept children home. One attendee whose children were in an off-base commercial daycare said that she was required to pay for her spot at the daycare center regardless of whether or not she brought the child. This led to a discussion about regulations and it was learned that Defense Department rules permitted charges of this nature.

There was now an issue on the table for future consideration.

Then the presenter related that there was another cause of the December variance. Charges to soldier families for daycare are on sliding scale with lower ranks paying a lower price. The mix of lower rank soldiers’ children at the center had increased dramatically. Since the mix is unlikely to change rapidly it this would be a chronic problem with significant annual impact. This was too big a problem to be worked in the After Action Review but the issue had now gotten the full attention of all present.

An important problem had been discovered that would need significant future work.

Conclusions

When I returned to Fort Riley a few months later Child Care Center supervisor sought me out to show me her most recent results of which she was quite proud. She said, “I now feel empowered to run my Center. And I made a profit!”