The true cost of CFC ratings

[Fred McKim]

Re: The true cost of CFC ratings

You are assuming that all indirect labour hours that cannot be traced to a program are to be considered rating costs. Rather than assigning those indirect hours on the basis of direct labour hours or activity proportions among all the programs.

That's how you are going from 29% to 54% of the total. Your method seems to be almost doubling the cost that should be assigned to ratings. The question is not so much whether net income for the year was correct on the financials but how much of the costs are related to ratings.

Its not a particularly accurate method and seems to be skewing the rating costs to as high a figure as possible. The real cost of the ratings program is more like $15950. You are assigning very little costs to sales, which may be in fact operating at a loss.

These numbers may be interesting to prove a point but they are not a good starting point of activity based costing to manage the operations.

Attempting to reduce costs by spinning off the ratings program would not work either unless overall costs were reduced. Otherwise there would just be fewer programs to absorb the same $55000 total costs.

I also have to disagree with Vlad. There is nothing wrong with cost accounting. There is only a problem if you don't assign joint costs correctly on the basis of the right cost drivers.

1) Sorry you're wrong, I was trying not to go into too many details, but ratings accounted for 29%, other "programs" 25%, and "indirect" costs at 46%. This is how I approximated the "indirect" rating costs (ie just over 50% of the 46%). I certainly didn't assign them all to the rating expenses.

2) According to Gerry there is very little work involved with sales. Thus the expense it receives.

[Fred McKim]

Re: The true cost of CFC ratings

This is more nonsense from the CFC. Ratings could be contracted to an
individual with a computer who could then write off part of his/her rental against income. I would guess a number of bids would come in at $2 per participant in a tournament, leaving a $1 profit for the CFC.
I believe that when I was the ratings statistician for the CFC circa 1970,
I was paid 25 cents per participant and that included the publishing of a
ratings booklet. With inflation, I guess, the 25c is about $2 today.

Sorry, Vlad, but I have better things to do than post "nonsense" on behalf of the CFC.

1) This is break-even for this year. There are some fixed cost to the ratings, although the majority of the costs would be variable.

2) If we take junior tournament participations to account for about a third of CFC participations, the average rating fee is reduced from $3.00 to $2.17. This pretty well jives with your suggested bid amount.

3) As for calculating just ratings by somebody, it would be impossible to separate the rating function from the membership function, now.

[Zeljko Kitich]

Re: The true cost of CFC ratings

Okay then if that's the break down, that ratings takes more time than all the other programs combined then you are completely correct in how you are assigning the indirect labour costs.

I was thinking of sales in terms of not only time but in packaging material and storage space.

[Fred McKim]

Re: The true cost of CFC ratings

Okay then if that's the break down, that ratings takes more time than all the other programs combined then you are completely correct in how you are assigning the indirect labour costs.

I was thinking of sales in terms of not only time but in packaging material and storage space.

Our sales function is outsourced. Someone places an order and it gets passed along to our "shipper", who we pay monthly for their share. We keep approximately 20% less shipping (I think).

We have no inventory, and no shipping to do !!

[Zeljko Kitich]

Re: The true cost of CFC ratings

Our sales function is outsourced. Someone places an order and it gets passed along to our "shipper", who we pay monthly for their share. We keep approximately 20% less shipping (I think).

We have no inventory, and no shipping to do !!

Thanks, I forgot that that had been done. As I said your figures look perfectly accurate to me with all the details you just gave.

[Vlad Drkulec]

Re: The true cost of CFC ratings

I also have to disagree with Vlad. There is nothing wrong with cost accounting. There is only a problem if you don't assign joint costs correctly on the basis of the right cost drivers.

There is nothing wrong with cost accounting as long as you don't rely on it alone when making business decisions because cost accounting tends to distort reality and occasionally support bad decisions that would not be made if a discounted cash flow analysis were done to analyse the effects of those decisions.

[Zeljko Kitich]

Re: The true cost of CFC ratings

There is nothing wrong with cost accounting as long as you don't rely on it alone when making business decisions because cost accounting tends to distort reality and occasionally support bad decisions that would not be made if a discounted cash flow analysis were done to analyse the effects of those decisions.

I agree with you totally there; that's why in accounting class we don't just look at the numbers but business cases as well. We are also taught what type of decisions the cost assignments can support and which they can't. However, there is a lot to be said for activity based cost accounting to assign costs correctly. The classic example being selling one product at a loss and undercutting all competition and the other overypriced and uncompetetive because the cost assignments were not correct. That's a blueprint for bankruptcy.

[Paul Leblanc]

Re: The true cost of CFC ratings

I would like to commend Fred for taking the time to do this analysis and share it with the rest of us.

I don't see that there is much left to cut in the way of expenses (unless we reduce or eliminate the bulletin - something I do not support personally - remember the hue an cry amongst the membership when we eliminated the magazine?). I also would like to know why we rate junior events below cost.

On the revenue side, I expect that the Foundation will contribute somewhat more than budgeted (I forecast $9,000 will be submitted in May 2011).

The executive has almost no flexibility to support programs to promote chess or to assist with important events such as the Olympiad or the national championships. Perhaps we should be talking about a small increase to the annual membership renewal with a discount to new members.

[Gary Ruben]

Re: The true cost of CFC ratings

I agree with you totally there; that's why in accounting class we don't just look at the numbers but business cases as well. We are also taught what type of decisions the cost assignments can support and which they can't. However, there is a lot to be said for activity based cost accounting to assign costs correctly. The classic example being selling one product at a loss and undercutting all competition and the other overypriced and uncompetetive because the cost assignments were not correct. That's a blueprint for bankruptcy.

What kind of mark would that Statement of Revenue and Expenditures which was posted in the other thread get in accounting class these days? It looked like category headings with no breakdown and items. Other programs is a large percentage of the revenue, around 25 percent, and it's not broken down.

Also, we don't know the state of the finances and stability without a balance sheet. Something which lists all the assets and liabilities. Stuff like the ownership interest, if any, of the federation in the foundation.

I saw some mention of depreciating assets like the new web site so a Cash Flow statement would also be nice. Things like amortization and depreciation are non cash items.

[Zeljko Kitich]

Re: The true cost of CFC ratings

What kind of mark would that Statement of Revenue and Expenditures which was posted in the other thread get in accounting class these days? It looked like category headings with no breakdown and items. Other programs is a large percentage of the revenue, around 25 percent, and it's not broken down.

Also, we don't know the state of the finances and stability without a balance sheet. Something which lists all the assets and liabilities. Stuff like the ownership interest, if any, of the federation in the foundation.

I saw some mention of depreciating assets like the new web site so a Cash Flow statement would also be nice. Things like amortization and depreciation are non cash items.

I don't know which other thread you mean. You have to remember anything posted here is not necessarily the official financials. You are correct that the official statements would include balance sheet, income statement and cash flow. The level of detail for general purpose financial statements can vary. If you pick up the general purpose financials for many an organization you will get broad categories and not the same details as you would in internal management accounting reports. The question to ask with general purpose financials is what kind of financial shape is this organization; not how would I run this organization based on these figures. For the later you would need many more details.

Fred has stated he will be amortizing the new website over 3 years which seems reasonable. Amortization figures with note disclosure should normally be given so that we can see for ourselves what these non-cash items are.

[Tom O'Donnell]

Re: The true cost of CFC ratings

... I also would like to know why we rate junior events below cost...

How about because the CFC realized there was potential money in junior chess, long after CMA had proven successful. So they decided to try to compete, and one of the ways to compete was on the price of ratings. I guess they figured what they lost on each transaction they would make up on volume. ;-)

I find it interesting that chess players, who have a reputation for being cheapskates, don't find it strange that they are subsidizing the rating of the children of middle-class and upper middle-class parents. Considering the costs of activities like hockey, no parents are going to balk at having to pay an extra $2.50 per event to have their kid's chess rated.

[Gary Ruben]

Re: The true cost of CFC ratings

Perhaps we should be talking about a small increase to the annual membership renewal with a discount to new members.

Why should existing members support new members?

Is it some kind of badge of honour in the chess community?

[Vlad Drkulec]

Re: The true cost of CFC ratings

I find it interesting that chess players, who have a reputation for being cheapskates, don't find it strange that they are subsidizing the rating of the children of middle-class and upper middle-class parents. Considering the costs of activities like hockey, no parents are going to balk at having to pay an extra $2.50 per event to have their kid's chess rated.

No parents are going to balk but what about the organizers? In Windsor we have had CFC rated, CMA rated and unrated events for children and I don't see any large differences in participation related to how the tournament was rated. The biggest event of the year is the Windsor Chess Challenge which is not rated and attracts 1400 participants over two days (this year after entries were limited to reduce the size of the event).

[Fred McKim]

Re: The true cost of CFC ratings

What kind of mark would that Statement of Revenue and Expenditures which was posted in the other thread get in accounting class these days? It looked like category headings with no breakdown and items. Other programs is a large percentage of the revenue, around 25 percent, and it's not broken down.

Also, we don't know the state of the finances and stability without a balance sheet. Something which lists all the assets and liabilities. Stuff like the ownership interest, if any, of the federation in the foundation.

I saw some mention of depreciating assets like the new web site so a Cash Flow statement would also be nice. Things like amortization and depreciation are non cash items.

Gary all of this stuff is available on the CFC website under the Governors Letter link.

On the financial statements, "other programs" is for the most part in and out money. Generally money for the WYCC generated from CYCC entries and parents contributions - it could be excluded from both sides of the balance sheet with not harm done.

[Tom O'Donnell]

Re: The true cost of CFC ratings

No parents are going to balk but what about the organizers? In Windsor we have had CFC rated, CMA rated and unrated events for children and I don't see any large differences in participation related to how the tournament was rated. The biggest event of the year is the Windsor Chess Challenge which is not rated and attracts 1400 participants over two days (this year after entries were limited to reduce the size of the event).

Isn't that proving my point? The CFC derives no net revenue from rating things cheaply. The parents of serious players don't mind paying. The participants and parents who are not serious couldn't care less about CFC ratings or any ratings. I don't see any upside to the subsidy when there is already a nation-wide rating system for kids in Canada who are interested in getting their feet wet in competitive chess.