The true cost of CFC ratings

[Fred McKim]

There has been some recent discussion here concerning what it actually costs to do CFC ratings. I will attempt to answer this question.

2009/10 saw CFC Admin expenses of approx $55,000. We need to determine what % of that is for ratings.

Based on a report from Gerry Lichtfield in the fall, approximately 29% of his time is spent on the ratings, but when we remove things like phone calls, e-mails, accounting, banking, ie, things that don't directly go against any particular program, ratings work out to 54% of the EKG expense - applying that to the total admin expense (also includes office and misc) we get about $30,000 spent on ratings. Pretty well a break-even program, at least when done on a national level.

[Zeljko Kitich]

Re: The true cost of CFC ratings

There has been some recent discussion here concerning what it actually costs to do CFC ratings. I will attempt to answer this question.

2009/10 saw CFC Admin expenses of approx $55,000. We need to determine what % of that is for ratings.

Based on a report from Gerry Lichtfield in the fall, approximately 29% of his time is spent on the ratings, but when we remove things like phone calls, e-mails, accounting, banking, ie, things that don't directly go against any particular program, ratings work out to 54% of the EKG expense - applying that to the total admin expense (also includes office and misc) we get about $30,000 spent on ratings. Pretty well a break-even program, at least when done on a national level.

Isnt it just a case of determining how many direct labour hours are involved in doing the ratings compared to the direct labour hours available in total. Then applying fixed overhead and variable overhead (including indirect labour) on the basis of direct labour hours.

So at a rough guess if ratings take up 1/3 of the time they should absorb 1/3 of the overhead costs, for a total of 1/3 of the total costs of direct labour and overhead (including indirect labour such as any admin fees or reimbursements paid, if any, to the CFC executive).

The same would be done for the time spent on doing the magazine, handling sales etc. If there are seperable costs for the other programs, such as shipping supplies etc. then they should be separated from joint costs.

[Fred McKim]

Re: The true cost of CFC ratings

Isnt it just a case of determining how many direct labour hours are involved in doing the ratings compared to the direct labour hours available in total. Then applying fixed overhead and variable overhead (including indirect labour) on the basis of direct labour hours.

So at a rough guess if ratings take up 1/3 of the time they should absorb 1/3 of the overhead costs, for a total of 1/3 of the total costs of direct labour and overhead (including indirect labour such as any admin fees or reimbursements paid, if any, to the CFC executive).

The same would be done for the time spent on doing the magazine, handling sales etc. If there are seperable costs for the other programs, such as shipping supplies etc. then they should be separated from joint costs.

After removing "overhead", the rating expense was approx 54% of "programs"......

[Gary Ruben]

Re: The true cost of CFC ratings

After removing "overhead", the rating expense was approx 54% of "programs"......

You do mean "programs" and not "other programs" from that financial statement? The reason I'm asking is that 54% of "other programs" seems reasonable while 54% of "programs" looks like a lot as it exceeds the amount recorded in "ratings" by a fair amount.

[Fred McKim]

Re: The true cost of CFC ratings

You do mean "programs" and not "other programs" from that financial statement? The reason I'm asking is that 54% of "other programs" seems reasonable while 54% of "programs" looks like a lot as it exceeds the amount recorded in "ratings" by a fair amount.

The cost of ratings comes from Administrative expenses. I'm not talking about anything else.

Some of these expenses we can approximate fairly well, such as how much time Gerry spends on the ratings and computer related taks, ditto memberships, national programs, intenrational programs, FIDE, web site, newsletter, equipment sales, CFC governance.

However things like phone calls, e-mails, office expenses we can at best estimate where to charge them to. I based it on the relative use of what I called programs (see above paragrpah).

I estimate that the ratings are break even.

This is a useful starting point.

[Vlad Drkulec]

Re: The true cost of CFC ratings

There has been some recent discussion here concerning what it actually costs to do CFC ratings. I will attempt to answer this question.

2009/10 saw CFC Admin expenses of approx $55,000. We need to determine what % of that is for ratings.

Based on a report from Gerry Lichtfield in the fall, approximately 29% of his time is spent on the ratings, but when we remove things like phone calls, e-mails, accounting, banking, ie, things that don't directly go against any particular program, ratings work out to 54% of the EKG expense - applying that to the total admin expense (also includes office and misc) we get about $30,000 spent on ratings. Pretty well a break-even program, at least when done on a national level.

This is another case where classic cost accounting fails and we need to look at marginal costs in order to determine what the costs and profits from ratings are. The correct procedure is to use a discounted cash flow model with the discount applied being the after tax cost of capital (lets call it 10% for the sake of simplicity). If the CFC got out of the rating business completely, this would save 29% of Gerry's time lets call it a round $13,000. It would not reduce any of the items that don't go against any particular program. That is really the only relevant factor. If we had no rating fees in 2010 the CFC would have lost $28,500 in cash flows. If we discount the cash flows at 10% and assume that there will be no increase in rating fees nor any change in level of activity then that business is worth $285,000 in perpetuity. Lower the after tax cost of capital to 5% and that number goes up to $570,000. Eliminating the 29% of the job related to ratings would not necessarily result in any savings since it is doubtful that we could reduce the CFC office expenses by eliminating ratings but if we did and could then eliminating the rating business would lose the CFC $15,500 a year in revenue net of expenses.

Eliminating ratings might significantly reduce membership renewals since most people join to play in tournaments and get a rating.

[Roger Patterson]

Re: The true cost of CFC ratings

This is another case where classic cost accounting fails and we need to look at marginal costs in order to determine what the costs and profits from ratings are. The correct procedure is to use a discounted cash flow model with the discount applied being the after tax cost of capital (lets call it 10% for the sake of simplicity). If the CFC got out of the rating business completely, this would save 29% of Gerry's time lets call it a round $13,000. It would not reduce any of the items that don't go against any particular program. That is really the only relevant factor. If we had no rating fees in 2010 the CFC would have lost $28,500 in cash flows. If we discount the cash flows at 10% and assume that there will be no increase in rating fees nor any change in level of activity then that business is worth $285,000 in perpetuity. Lower the after tax cost of capital to 5% and that number goes up to $570,000. Eliminating the 29% of the job related to ratings would not necessarily result in any savings since it is doubtful that we could reduce the CFC office expenses by eliminating ratings but if we did and could then eliminating the rating business would lose the CFC $15,500 a year in revenue net of expenses.

Eliminating ratings might significantly reduce membership renewals since most people join to play in tournaments and get a rating.

I don't think anybody is talking about eliminating ratings. I think that some people are talking about eliminating other stuff like memberships with the logic that the office is not needed then thereby getting rid of a lot of overhead. Maintaining an office so you can manage the collection and maintenance of the membership list is expensive.

As for your cash flow calculation, I've made that point before. The rating system is the CFC's most valuable asset. It really should be better taken care of.

[Roger Patterson]

Re: The true cost of CFC ratings

There has been some recent discussion here concerning what it actually costs to do CFC ratings. I will attempt to answer this question.

2009/10 saw CFC Admin expenses of approx $55,000. We need to determine what % of that is for ratings.

Based on a report from Gerry Lichtfield in the fall, approximately 29% of his time is spent on the ratings, but when we remove things like phone calls, e-mails, accounting, banking, ie, things that don't directly go against any particular program, ratings work out to 54% of the EKG expense - applying that to the total admin expense (also includes office and misc) we get about $30,000 spent on ratings. Pretty well a break-even program, at least when done on a national level.

thankyou. It's a good number to know.

One corollory of your observation is that if the ratings are overall breakeven, the CFC is losing money on rating junior events (with no membership needed) at $0.50/player. That might be a strategic decision, but somehow I think it is just happenstance.

[Vlad Drkulec]

Re: The true cost of CFC ratings

I don't think anybody is talking about eliminating ratings.

I think that they may be talking about it without realizing it, if they try to strangle it with significant fee increases that punish chess activity which is what we are supposed to be trying to promote.

I think that some people are talking about eliminating other stuff like memberships with the logic that the office is not needed then thereby getting rid of a lot of overhead. Maintaining an office so you can manage the collection and maintenance of the membership list is expensive.

It is expensive but probably necessary under the current setup. Simplifying ratings calculation, updating and maintenance of lists would seem to be fairly trivial. My understanding was that the new website would have a lot of this built in or at least have the capability to have this added later.

As for your cash flow calculation, I've made that point before. The rating system is the CFC's most valuable asset. It really should be better taken care of.

I agree that it is the CFC's most valuable asset but I also think that they should be careful of how they tinker with things. Any fee increases seem hard to justify in the current situation.

[Fred McKim]

Re: The true cost of CFC ratings

This is another case where classic cost accounting fails and we need to look at marginal costs in order to determine what the costs and profits from ratings are. The correct procedure is to use a discounted cash flow model with the discount applied being the after tax cost of capital (lets call it 10% for the sake of simplicity). If the CFC got out of the rating business completely, this would save 29% of Gerry's time lets call it a round $13,000. It would not reduce any of the items that don't go against any particular program. That is really the only relevant factor. If we had no rating fees in 2010 the CFC would have lost $28,500 in cash flows. If we discount the cash flows at 10% and assume that there will be no increase in rating fees nor any change in level of activity then that business is worth $285,000 in perpetuity. Lower the after tax cost of capital to 5% and that number goes up to $570,000. Eliminating the 29% of the job related to ratings would not necessarily result in any savings since it is doubtful that we could reduce the CFC office expenses by eliminating ratings but if we did and could then eliminating the rating business would lose the CFC $15,500 a year in revenue net of expenses.

Eliminating ratings might significantly reduce membership renewals since most people join to play in tournaments and get a rating.

The time Gerry spends on ratings I have estimated as 52% of his time. 29% is directly measured from him. From the items that he hasn't applied to a useful program (like phone calls, banking, etc) I used an additional 23% as an approximation (pro-rating).

Here are some numbers (I used a calculator this time)

Ratings 27600
Memberships 7500
Web site 4900
CFC Governance 4200
equipment sales 2800
FIDE related 2400
National championships 1900
International play 1800
Newsletter 1200

Due to some rounding offs this doesn't quite add up to 54703 the 2009/10 CFC Adminstrative expenses.

Now coming up with net revenue / expense on everything we do

Ratings: 28582 - 27600 = $1000 profit
Memberships 46767 - 7500 - 2106 (Life members) = $37,100 profit
Sales 4340 - 2800 = $1500 profit
Chess Foundation = $3600 profit
Donations = $700 profit
Other (Advertizing) = $500 profit

Total of $44,400 in net revenue

Newsletter 7550 + 1200 = $8800
International & FIDE = 2400 + 1800 + 8045 = $12,200
National Tournaments = $1900
Web Site = $4900
CFC Governance = $4200

Total of $32,000 in net expenses

This ($12,400) is very close to the figure in the formal year end statements ($12,133 net revenue). We know this will be much lower this fiscal year because of the increase in the newsletter cost.

Increasing ratings by 25% might be doable, as there should be no or little cost to the CFC.

Sales should pick up once we get the new web site up and running. Web site cost will increase in the future as we amortize the cost of the new website over three years.

[Gary Ruben]

Re: The true cost of CFC ratings

I don't know how they pay, but if it's a fixed rate contract the extra players at 50 cents don't matter.

It's been my observation that in a situation where you have a couple of hundred people doing the same task some can consistantly outperform others in volume with the quality of the work being about equal.

In the clothing factory I worked one summer that was addressed with piece work. In the office where I worked it used to balance out.

[Fred McKim]

Re: The true cost of CFC ratings

I don't know how they pay, but if it's a fixed rate contract the extra players at 50 cents don't matter.

It's been my observation that in a situation where you have a couple of hundred people doing the same task some can consistantly outperform others in volume with the quality of the work being about equal.

In the clothing factory I worked one summer that was addressed with piece work. In the office where I worked it used to balance out.

I should be a bit careful in my words... with our present contractor there could be an increase in the adminstrative fees for either increased rating fees or membership fees collected above a threshold amount. In any case no more than 25% "tax" for ratings.

[Vlad Dobrich]

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.

[Aris Marghetis]

Re: The true cost of CFC ratings

It is expensive but probably necessary under the current setup. Simplifying ratings calculation, updating and maintenance of lists would seem to be fairly trivial. My understanding was that the new website would have a lot of this built in or at least have the capability to have this added later.

Unless I am grossly mistaken, the new website includes nothing to reduce rating costs. For example, when I rate kids tournaments with CMA, I just do web entry for 40c each.

[Zeljko Kitich]

Re: The true cost of CFC ratings

After removing "overhead", the rating expense was approx 54% of "programs"......

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 resulting in the rating costs being at the highest point possible of the range. The real cost of the ratings program based on the estimate of time spent is more like $15950. You are assigning very little in costs to sales, which may be in fact operating at a loss. That's the first place I would look at to see if costs could be reduced as little if any revenue is coming out of that.

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.