Differential cost strategy and activity-based costing at UOS

Accounting

Differential Cost

Differential Cost strategy when used by an educational entity such as UOS means that the institution determines what it would cost to offer alternative forms of education based on the number of students interested in choosing those alternative forms. In other words, by offering choices to the students based on the student's specific needs and desires and then measuring the difference in cost when compared to other educational offerings, the school will know exactly what the differential cost is. This allows the school to offer courses and activities in the most efficient and effective manner, and in a manner that produces the highest amount of revenue with the lowest cost. By knowing the difference between the school's offerings and what the same type of offerings are being offered by their competitors, the school will be capable of offering more for less. As an example, if the school decided to offer a computer course that drew 40 students paying $500 with a cost of $2,000 compared to offering a English course that drew 50 students paying $500 with a cost of $2,000 the differential cost is a positive $5,000 for the English class. The school would then know to offer the English class over the computer class.

Major activities and activity cost pools

The major activities at UOS include the following; teaching, the Center for Continuous Education, and student registrations and admission services. Additional activities that are evaluated as to their cost includes such items as Human Resources, Maintenance, Computer Services, Transportation and Facilities. Teaching, of course, is the mainstay of the institution. Without good teachers, the school suffers; loses students and revenues, and could possibly lead to a downward educational spiral from which the school never recovers. Therefore, hiring and keeping good teachers is very imperative to the success of the school. The Center for Continuous Education is also very important in that it provides comprehensive information and guidelines to students in search of educational success. Student registration and admissions are also major activities in that they facilitate the efficient generating of revenue by ensuring the course offerings match the desires of the majority of students interested in attending the school.

The cost pools for the three primary activities include 3,500,000 for teaching, 500,000 for Center for Continuous Education, and 1,600,000 for the student registration and admission services.

Secondary cost pools (or support pools) include the following items; human resource, maintenance, computer services, transportations and facilities. A cost for each of these pools is factored into the overhead as well and is based on assigning costs to the individual activities.

Assigning Cost Activities

The school needs to allocate the overhead of providing educational services to students in the most cost effective manner that also provides a method for determining efficiency and profit. To accomplish this objective, the school assigns cost to a variety of activity cost pools through the use of cost drivers that represent the used activities. The most interesting thing about assigning costs in this manner is that it does not replace existing accounting systems, instead it complements the existing systems by segregated overhead into various cost pools in order to provide cost accounting that is both accurate and comprehensive.

Overhead costs

Needless to say, total overhead costs will be different between the two scenarios. The total overhead in dollars for the 600 student scenario is slightly more than nine million ($9,092,055) as compared to the 900 student scenario which is $11, 879,114.

The total overhead provides a figure that can assist the school with its overall budget and by using ABC the school has the capability of determining the exact costs of each activity and the specific cost drivers as well.

Discussion

Profitability for the school is fairly simple then; take the amount of students registered at the school (600 versus 900) and times those numbers by a tuition amount per hour. As an example; if the tuition charged was $20,000 per student, then 600 students would generate $12,000,000.00 and 900 students would generate $18,000,000.00. The cost differential in this case for each scenario would be just under $3,000,000 (2,908,945)for 600 students and slightly more than $6,000,000.00 (6,121,886) for 900 students. It can therefore be said that by raising the number of students by 50% the school can raise its profits by more than 100%.

The scenario of 900 students compared to 600 students seems to be a far more profitable situation. The key is to determine how to present and maintain the activities needed with the various cost drivers. The benefits gained by using the ABC system in the school's organization is that it presents a clear picture of what the profitability will be based on the activities and cost drivers. Since the picture is now clear as to what the various cost drivers are, information can be provided to those personnel most likely to interact in the various settings providing those activities. Additionally, costs can be addressed with the knowledge that each component has been fully analyzed as to how each pertains to certain areas. The UOS saves money by allocating its resources to specific areas that will affect the overall profitability of the school. Because the cost drivers have been articulated the school will be able to pick and choose from the various cost drivers as to which ones need more allocated dollars, and which ones need less. This type of system specifies the exact areas of concern based on quantified numbers rather than just harboring a guess as to what exactly drives the costs of doing business at the school.

Conclusion

This report concludes that the school should allocate costs using the ABC system in that it will help to determine the profitability based on real numbers. Anytime such pertinent information can be had through the use of one system over another, the system that provides the truest data should be used.