reading: abc for higher education institutions group ii aftab usmani alexander derevin carla daniels...
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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