1. Reading: ABC for Higher Education Institutions Group II Aftab Usmani Alexander Derevin Carla Daniels Shantanu Kumar Singh

2. Can You Guess the Company? All product are of same cost All product are of same cost Introduces new products but no closure of old product lines Introduces new products but no closure of old product lines Departmental budget based on number of unit produced Departmental budget based on number of unit produced Cost increases are passed on to the customers Cost increases are passed on to the customers Customers are frustrated and unhappy Customers are frustrated and unhappy Still in Business

3. What is the major problem? Volume based costing Volume based costing Don’t know what activities goes into a course. Cost of those activities are unknown Don’t know what activities goes into a course. Cost of those activities are unknown Don’t know actual cost of each course that is offered Don’t know actual cost of each course that is offered Don’t know how to price courses. Some courses may be subsidizing others Don’t know how to price courses. Some courses may be subsidizing others Don’t know which courses to continue and which to drop Don’t know which courses to continue and which to drop

4. What’s The Solution? Adopt a professional attitude: Need to manage cost like any other manufacturing company Adopt a professional attitude: Need to manage cost like any other manufacturing company Implement Activity Based Costing Implement Activity Based Costing

5. ABC implementation step 1 Identify cost object Cost of a course 2 Identify output Courses 3 Identify activities Grading papers, class lectures, computer use, course design… 4 Make cost pools Computer use, facility use, instructor salary 5 Link activity cost to output 6 Analyze & Report

6. Example 1 Estimating Cost of a course – Varying resource consumption between academic units Assumption Different academic units consume resources in different proportions, but all courses in one academic unit have the same cost.

7. Faculty Salaries Administration Salaries Computer Facilities Physical Facilities Instructional Facilities Academic Unit 1 Academic Unit 2 Course 1 Course 2

8. Activity and Cost Data Cost Type Costs Academic Unit 1 Academic Unit 2 Total Activity Units Total Cost Cost/ Activity Unit Direct Cost # of faculty 201030 Avg. Salary $30,000$60,000 Total Direct Cost $600,000$600,000 Indirect Costs Computer Use 400 Hrs 1,600 Hrs 2,000 Hrs $800,000$400/Hr Facility Use 600,000 sq ft 400,000 sq ft 1,000,000 sq ft $400,000 $0.40/sq ft Instructional Service use 20 faculty members 10 faculty members 30 faculty members $600,000$20,000/ Faculty member Student Service use 2,700 students 600 students 3,300 students $660,000$200/student Total Indirect Cost $2,460,000 Total Costs $3,660,000 # of Courses 8537122

9. Cost per Course – Volume based costing Total Cost / Total number of courses = $3,660,000/122 = $30,000

10. Cost per Course – Activity-Based Costing Cost Element Cost/Activity Unit Academic---Unit #1 Academic---Unit # 2 Activity Consumed Total Cost Activity Consumed Total Cost Computer Use $400/hr400$160,0001,600$640,000 Facility Use $0.4/Sq.ft600,000$240,000400,000$160,000 Inst. Services Use $20,000/ faculty member 20$400,00020$400,000 Student Services $200/student2,700$540,000600$120,000 Salaries$600,000$600,000 Total Cost $1,940,000$1,720,000 # of courses 8537 Cost/Course$22,824$46,486

11. Cost per course ABC Vs Traditional Costing Course Traditional Costing Activity Based Costing Distortion in $ Distortion as % Academic Unit 1 $30,000$22,824($7,176) 24% Over Academic Unit 2 $30,000$46,486$16,486 55% Under

12. Example 2 Estimating cost of a course – varying resource consumption within academic units Assumption Each course is unique. Different activities are needed to offer each course. Therefore different courses should have different costs. Each course is unique. Different activities are needed to offer each course. Therefore different courses should have different costs.

13. Bill of Activity For A Course Activity Activity Level Activity Driver Activity Quantity Designing Course Course # of courses 64 Hours Initial Preparation Course # of courses 96 Hours Preparing Course Outline Batch Offering # of preparations 10 Hours Updating & Preparing Batch Offering # of preparations 45 Hours Class Meetings Batch Separation # of class hours ½ Hours Grading Exams Unit # of students ½ Hours Office Hours Unit # of students ½ Hours Grading Assignments Unit # of students 1/3 Hours

14. Some Other Data Average Faculty Salary = $115,200 Average Faculty Salary = $115,200 Average Number of working hours = 9 months * 4 weeks * 40 hours = 1,440 hours Average Number of working hours = 9 months * 4 weeks * 40 hours = 1,440 hours Average Cost/Hour=115,200 / 1,440 =$80/hr Average Cost/Hour=115,200 / 1,440 =$80/hr Average Duration of course = 15 weeks * 3 hours = 45 hours Average Duration of course = 15 weeks * 3 hours = 45 hours Average Class Size = 30 students per class Average Class Size = 30 students per class

15. Some Other Data……… Average Non-Instructional Cost= $96 per student credit hour Average Non-Instructional Cost= $96 per student credit hour Life of course = 8 semesters, 2 sections each semester = 16 sections Life of course = 8 semesters, 2 sections each semester = 16 sections

16. Bill of Activity For A Course Activity Activity Level Activity Driver Activity Quantity Usage/ section Activity Qty/ section Designing Course Course # of courses 64 Hours 1/16 4 Hours Initial Preparation Course # of courses 96 Hours 1/16 6 Hours Preparing Course Outline Batch Offering # of preparation 10 Hours ½ 5 Hours Updating & Preparing Batch Offering # of preparation 45 Hours ½ 22.5 Hours Class meetings Batch Separation # of class hours ½ Hours 1 45 Hours Grading Exams Unit # of student ½ Hours 30 15 Hours Office Hours Unit # of student ½ Hours 30 15 Hours Grading Assignments Unit # of student 1/3 Hours 30 10 Hours Total Hours 122.5 Hours

17. Cost of One Course Instructional Cost of a course per section = 122.5 * $80 = $9,800 Instructional Cost of a course per section = 122.5 * $80 = $9,800 Instructional Cost per student = $9,800/30 = $326.67 Instructional Cost per student = $9,800/30 = $326.67 Non Instructional Cost per course per student = $96 * 3 = $288 Non Instructional Cost per course per student = $96 * 3 = $288 Total Cost per student per course = $228 + $326.67 = $614.67 Total Cost per student per course = $228 + $326.67 = $614.67

18. Example 3 Estimating Cost of a Degree Cost of degree is the sum of both the costs courses in a degree & cost of services

19. Information Provided There are 4 type of courses (A,B,C and D) with cost per course being $300, $600, $900 & $1200, respectively There are 4 type of courses (A,B,C and D) with cost per course being $300, $600, $900 & $1200, respectively Average student takes 5 courses per semester and will complete a degree (40 courses) in 8 semesters. Average student takes 5 courses per semester and will complete a degree (40 courses) in 8 semesters. Non-Instructional Cost per semester per student is $500 Non-Instructional Cost per semester per student is $500

20. Bill of Activities – Degree X & Y CourseCost/Course Degree X # of courses Degree Y # of courses Type A $300424 Type B $60066 Type C $900106 Type D $1,200204 Total4040

21. Cost of Degree – Traditional Costing Method Average Cost of a course = (300 + 600 + 900 + 1200)/4 = $750 Average Cost of a course = (300 + 600 + 900 + 1200)/4 = $750 Cost of Degree = (# of courses) (Average cost of a course) + (# of semesters) (Non Instructional Cost/Semester/student) Cost of Degree = (# of courses) (Average cost of a course) + (# of semesters) (Non Instructional Cost/Semester/student) = 40 * $750 + 8 * $500 = 40 * $750 + 8 * $500 = $34,000 = $34,000

22. Cost of Degree – ABC Costing Method Course Cost/ Cours e Degree X # of Courses Degree X Cost Degree Y # of Courses Degree Y Cost Type A $3004$1,20024$7,200 Type B $6006$3,6006$3,600 Type C $90010$9,0006$5,400 Type D $1,20 0 20$24,0004$4,800 Total40$37,80040$21,000 Non Instructional Cost 8 * $500 $4,000$4,000 Total Cost per Degree $41,800$25,00

23. Is ABC The right way to go? Some Benefits Some Benefits Better cost information Better cost information Better identification of resource needs Better identification of resource needs Better distribution of scare resources Better distribution of scare resources Better course & program mix Better course & program mix Better cost control Better cost control