Question 9.OA.2: Activity-Based Costing in a Business School How much does it...
Activity-Based Costing in a Business School
How much does it ‘cost’ to teach an undergraduate student for one year? Is it more expensive to teach Ph.D. students, MBAs, or undergraduates? Most universities do not have good answers to these questions, despite complex and detailed accounting systems. Also, unlike manufacturing organizations, universities do not have products in the typical sense. Many interrelated costs and benefits result from the activities that a university undertakes. Activity-based costing is one way that can provide insights into the cost and benefits of the outputs of a university system. A case study at a large business school developed an ABC model of its accounting department. As in the manufacturing sector, the objective was to allocate overhead costs in a manner that captured how different cost objects consumed resources. The study determined that the business school, like most universities, had a number of features that made cost management more difficult:
• decentralized decision making with critical decisions taken at lower levels
• complex accounting and budget systems geared to compliance reporting
• a lack of clearly defined outcomes and products
• many interconnected activities (e.g., teaching, research, administration)
• the consumer and the producer of activities frequently the same
• interrelated costs and revenues in that certain activities only undertaken due to the receipt of specific funds tied to the activity
• the impact of capacity constraints on cost and quality of activities.
The ABC model focused on the accounting department of the business school. The first stage developed a set of cost objects and cost pools. The cost objects were the various programs, research outputs, service outputs, and unused capacity. The cost pools were the faculty resource costs and non-faculty resource costs. Faculty costs (compensation, travel and research allowances, etc.) were subdivided into four pools: teaching, research, service, and advising of doctoral students. Non faculty costs were placed into three pools: teaching support, research support, and general administration. In the second stage, costs of the business school were identified and allocated in the same manner. These costs included the career center, computer technology, media services, and the costs of administrative offices. Once the costs of the various cost pools were assigned to the cost objects, the study examined specific cost objects to determine if the ABC model provided insights not available from the existing approach to costing. The following points summarize the results of the study:
• Significant differences exist in the per-student cost of the various academic programs. For instance, the cost of a Ph.D. student per year is approximately 3.5 times that of a student in a combined undergraduate/masters program.
• Unused capacity represents a major cost. This unused capacity results from a number of factors ranging from under-subscribed classes and inefficient course scheduling.
• Space is a costly commodity at the business school, often comparable to the sum of all other costs.
• Programs and activities do not make uniform use of support services, but the cost of the latter tends to be spread uniformly across all areas based on head count.
• ABC offers one way to focus on the cost-benefit of activity spending, and a better way to determine the efficiency in delivering teaching, research and service outputs. What factors might contribute to the greater annual total cost per student in the Ph.D. program compared to the five-year combined undergraduate/masters program? Why would the cost of capacity tend to be overlooked in a university environment? Why would university faculty and staff be hesitant perhaps about efforts to cost their activities?
