Reading: ABC for Higher Reading: ABC for Higher Education Institutions Education Institutions

Group IIGroup IIAftab UsmaniAftab Usmani

Alexander DerevinAlexander Derevin

Carla DanielsCarla Daniels

Shantanu Kumar SinghShantanu Kumar Singh

Can You Guess the Company?Can You Guess the Company?

All product are of same costAll product are of same cost Introduces new products but no Introduces new products but no

closure of old product linesclosure of old product lines Departmental budget based on Departmental budget based on

number of unit producednumber of unit produced Cost increases are passed on to the Cost increases are passed on to the

customerscustomers Customers are frustrated and unhappyCustomers are frustrated and unhappy

Still in BusinessStill in Business

What is the major problem?What is the major problem?

Volume based costing Volume based costing Don’t know what activities goes into a Don’t know what activities goes into a

course. Cost of those activities are course. Cost of those activities are unknownunknown

Don’t know actual cost of each course that Don’t know actual cost of each course that is offeredis offered

Don’t know how to price courses. Some Don’t know how to price courses. Some courses may be subsidizing otherscourses may be subsidizing others

Don’t know which courses to continue and Don’t know which courses to continue and which to dropwhich to drop

What’s The Solution?What’s The Solution?

Adopt a professional attitude: Need Adopt a professional attitude: Need to manage cost like any other to manage cost like any other manufacturing companymanufacturing company

Implement Activity Based CostingImplement Activity Based Costing

Example 1Example 1

Estimating Cost of a course – Varying Estimating Cost of a course – Varying resource consumption between resource consumption between academic unitsacademic units

AssumptionAssumptionDifferent academic units consume Different academic units consume resources in different proportions, resources in different proportions, but all courses in one academic unit but all courses in one academic unit have the same cost.have the same cost.

Faculty Salaries

Administration Salaries

Computer Facilities

Physical Facilities

Instructional Facilities

Academic Unit 1

Academic Unit 2

Course 1

Course 2

Activity and Cost DataActivity and Cost Data

Cost TypeCost Type CostsCosts Academic Academic Unit 1Unit 1

Academic Academic Unit 2Unit 2

Total Total Activity Activity UnitsUnits

Total CostTotal Cost Cost/Cost/

Activity Activity UnitUnit

Direct Direct CostCost

# of faculty# of faculty 2020 1010 3030

Avg. SalaryAvg. Salary $30,000$30,000 $60,000$60,000

Total Total Direct Direct CostCost

$600,000$600,000 $600,000$600,000

Indirect Indirect CostsCosts

Computer Computer UseUse

400 Hrs400 Hrs 1,600 Hrs1,600 Hrs 2,000 Hrs2,000 Hrs $800,000$800,000 $400/Hr$400/Hr

Facility UseFacility Use 600,000 sq 600,000 sq ftft

400,000 sq ft400,000 sq ft 1,000,000 sq 1,000,000 sq ftft

$400,000$400,000 $0.40/sq ft$0.40/sq ft

Instructional Instructional Service useService use

20 faculty 20 faculty membersmembers

10 faculty 10 faculty membersmembers

30 faculty 30 faculty membersmembers

$600,000$600,000 $20,000/$20,000/

Faculty Faculty membermember

Student Student Service useService use

2,700 2,700 studentsstudents

600 students600 students 3,300 3,300 studentsstudents

$660,000$660,000 $200/$200/

studentstudent

Total Total Indirect Indirect CostCost

$2,460,000$2,460,000

Total Total CostsCosts

$3,660,000$3,660,000

# of # of CoursesCourses

8585 3737 122122

Cost per Course – Volume based Cost per Course – Volume based costingcosting

Total Cost / Total number of coursesTotal Cost / Total number of courses

= $3,660,000/122 = $30,000 = $3,660,000/122 = $30,000

Cost per Course – Activity-Based CostingCost per Course – Activity-Based Costing

Cost Cost ElementElement

Cost/Activity Cost/Activity UnitUnit

Academic---Unit #1Academic---Unit #1 Academic---Unit # 2Academic---Unit # 2

Activity Activity ConsumeConsumedd

Total CostTotal Cost Activity Activity ConsumedConsumed

Total CostTotal Cost

Computer Computer UseUse

$400/hr$400/hr 400400 $160,000$160,000 1,6001,600 $640,000$640,000

Facility UseFacility Use $0.4/Sq.ft$0.4/Sq.ft 600,000600,000 $240,000$240,000 400,000400,000 $160,000$160,000

Inst. Inst. Services Services UseUse

$20,000/ $20,000/ faculty faculty membermember

2020 $400,000$400,000 2020 $400,000$400,000

Student Student ServicesServices

$200/$200/

studentstudent2,7002,700 $540,000$540,000 600600 $120,000$120,000

SalariesSalaries $600,000$600,000 $600,000$600,000

Total CostTotal Cost $1,940,000$1,940,000 $1,720,000$1,720,000

# of # of coursescourses

8585 3737

Cost/Cost/CourseCourse

$22,824$22,824 $46,486$46,486

Cost per courseCost per courseABC Vs Traditional CostingABC Vs Traditional Costing

CourseCourse TraditionTraditional Costingal Costing

Activity Activity Based Based CostingCosting

Distortion Distortion in $in $

Distortion Distortion as %as %

Academic Academic Unit 1Unit 1

$30,000$30,000 $22,824$22,824 ($7,176)($7,176) 24% Over24% Over

Academic Academic Unit 2Unit 2

$30,000$30,000 $46,486$46,486 $16,486$16,486 55% Under55% Under

Example 2Example 2

Estimating cost of a course – varying Estimating cost of a course – varying resource consumption within resource consumption within academic unitsacademic units

AssumptionAssumption

Each course is unique. Different Each course is unique. Different activities are needed to offer each activities are needed to offer each course. Therefore different courses course. Therefore different courses should have different costs.should have different costs.

Bill of Activity For A CourseBill of Activity For A Course

ActivityActivity Activity Activity LevelLevel

Activity Activity DriverDriver

Activity Activity QuantityQuantity

Designing Designing CourseCourse

CourseCourse # of courses# of courses 64 Hours64 Hours

Initial Initial PreparationPreparation

CourseCourse # of courses# of courses 96 Hours96 Hours

Preparing Preparing Course OutlineCourse Outline

Batch OfferingBatch Offering # of # of preparationspreparations

10 Hours10 Hours

Updating & Updating & PreparingPreparing

Batch OfferingBatch Offering # of # of preparationspreparations

45 Hours45 Hours

Class MeetingsClass Meetings Batch Batch SeparationSeparation

# of class hours# of class hours ½ Hours½ Hours

Grading ExamsGrading Exams UnitUnit # of students# of students ½ Hours½ Hours

Office HoursOffice Hours UnitUnit # of students# of students ½ Hours½ Hours

Grading Grading AssignmentsAssignments

UnitUnit # of students# of students 1/3 Hours1/3 Hours

Some Other DataSome Other Data

Average Faculty Salary = $115,200Average Faculty Salary = $115,200 Average Number of working hours = Average Number of working hours =

9 months * 4 weeks * 40 hours = 9 months * 4 weeks * 40 hours = 1,440 hours1,440 hours

Average Cost/Hour=115,200 / 1,440 Average Cost/Hour=115,200 / 1,440 =$80/hr=$80/hr

Average Duration of course = 15 Average Duration of course = 15 weeks * 3 hours = 45 hoursweeks * 3 hours = 45 hours

Average Class Size = 30 students per Average Class Size = 30 students per classclass

Some Other Data………Some Other Data………

Average Non-Instructional Cost= $96 Average Non-Instructional Cost= $96 per student credit hourper student credit hour

Life of course = 8 semesters, 2 Life of course = 8 semesters, 2 sections each semester = 16 sections each semester = 16 sectionssections

Bill of Activity For A CourseBill of Activity For A CourseActivityActivity Activity Activity

LevelLevelActivity Activity DriverDriver

Activity Activity QuantityQuantity

Usage/Usage/sectiosectionn

Activity Activity Qty/ Qty/ sectionsection

Designing Designing CourseCourse

CourseCourse # of courses# of courses 64 Hours 64 Hours 1/161/16 4 Hours4 Hours

Initial Initial PreparationPreparation

CourseCourse # of courses# of courses 96 Hours96 Hours 1/161/16 6 Hours6 Hours

Preparing Preparing Course OutlineCourse Outline

Batch Batch OfferingOffering

# of # of preparationpreparation

10 Hours10 Hours ½½ 5 Hours5 Hours

Updating & Updating & PreparingPreparing

Batch Batch OfferingOffering

# of # of preparationpreparation

45 Hours45 Hours ½½ 22.5 Hours22.5 Hours

Class meetingsClass meetings Batch Batch SeparationSeparation

# of class # of class hourshours

½ Hours½ Hours 11 45 Hours45 Hours

Grading ExamsGrading Exams UnitUnit # of student# of student ½ Hours½ Hours 3030 15 Hours15 Hours

Office HoursOffice Hours UnitUnit # of student# of student ½ Hours½ Hours 3030 15 Hours15 Hours

Grading Grading AssignmentsAssignments

UnitUnit # of student# of student 1/3 Hours1/3 Hours 3030 10 Hours10 Hours

Total HoursTotal Hours 122.5 122.5 HoursHours

Cost of One CourseCost of One Course

Instructional Cost of a course per Instructional Cost of a course per section = 122.5 * $80 = $9,800section = 122.5 * $80 = $9,800

Instructional Cost per student = Instructional Cost per student = $9,800/30 = $326.67$9,800/30 = $326.67

Non Instructional Cost per course per Non Instructional Cost per course per student = $96 * 3 = $288student = $96 * 3 = $288

Total Cost per student per course = Total Cost per student per course = $228 + $326.67 = $614.67$228 + $326.67 = $614.67

Example 3 Example 3 Estimating Cost of a DegreeEstimating Cost of a Degree

Cost of degree is the sum of both the Cost of degree is the sum of both the costs courses in a degree & cost of costs courses in a degree & cost of servicesservices

Information ProvidedInformation Provided

There are 4 type of courses (A,B,C There are 4 type of courses (A,B,C and D) with cost per course being and D) with cost per course being $300, $600, $900 & $1200, $300, $600, $900 & $1200, respectivelyrespectively

Average student takes 5 courses per Average student takes 5 courses per semester and will complete a degree semester and will complete a degree (40 courses) in 8 semesters.(40 courses) in 8 semesters.

Non-Instructional Cost per semester Non-Instructional Cost per semester per student is $500per student is $500

Bill of Activities – Degree X & YBill of Activities – Degree X & Y

CourseCourse Cost/CourseCost/Course Degree X Degree X

# of courses# of coursesDegree Y Degree Y

# of courses# of courses

Type AType A $300$300 44 2424

Type BType B $600$600 66 66

Type CType C $900$900 1010 66

Type DType D $1,200$1,200 2020 44

TotalTotal 4040 4040

Cost of Degree – Traditional Cost of Degree – Traditional Costing MethodCosting Method

Average Cost of a course = (300 + Average Cost of a course = (300 + 600 + 900 + 1200)/4 = $750600 + 900 + 1200)/4 = $750

Cost of Degree = (# of courses) Cost of Degree = (# of courses) (Average cost of a course) + (# of (Average cost of a course) + (# of semesters) (Non Instructional semesters) (Non Instructional Cost/Semester/student)Cost/Semester/student)

= 40 * $750 + 8 * $500= 40 * $750 + 8 * $500

= $34,000 = $34,000

Cost of Degree – ABC Costing Cost of Degree – ABC Costing MethodMethod

CourseCourse Cost/Cost/CourCoursese

Degree X Degree X

# of # of CoursesCourses

Degree Degree XX

CostCost

Degree Degree Y Y

# of # of CoursesCourses

Degree YDegree Y

CostCost

Type AType A $300$300 44 $1,200$1,200 2424 $7,200$7,200

Type BType B $600$600 66 $3,600$3,600 66 $3,600$3,600

Type CType C $900$900 1010 $9,000$9,000 66 $5,400$5,400

Type DType D $1,20$1,2000

2020 $24,000$24,000 44 $4,800$4,800

TotalTotal 4040 $37,800$37,800 4040 $21,000$21,000

Non Non InstructionInstructional Costal Cost

8 * 8 * $500$500

$4,000$4,000 $4,000$4,000

Total Total Cost per Cost per DegreeDegree

$41,800$41,800 $25,00$25,00

Is ABC The right way to go?Is ABC The right way to go?

Some BenefitsSome Benefits Better cost informationBetter cost information Better identification of resource Better identification of resource

needsneeds Better distribution of scare resourcesBetter distribution of scare resources Better course & program mixBetter course & program mix Better cost controlBetter cost control