Abc for Higher Education

Activity-Based Costing for Higher Education Institutions

The article focuses on higher education institutions (HEIs), opening with a critical view of its accounting and management practices, and highlighting issues such as outdated and bureaucratic procedures, inefficiency and waste, along with rising prices and declining quality. There are pressures on HEIs from diminishing resources, competition, unhappy students, parents, and legislators to examine ways to manage their costs better. One suggestion is the use of activity based costing (ABC), used by only a few of the more than 3,000 colleges and universities in the United States. Successful utilization of this method requires administrators to first understand the activities and costs associated with the programs and courses offered by the institution. As in a manufacturing environment, volume and complexity add to the cost of courses and degree programs.

To set the foundation, the authors offer relevant information in the ABC process including defining costs, activities, the steps to follow in applying ABC, and the activity classification. In HEIs, identifying costs objects and outputs are described as being straightforward, with complexity arising when attempting to identify activities. Here ABC identifies and classifies four major activities including unit, batch, product, and facility, and offers examples of activities and drivers at each level of activity. In applying ABC to HEIs, the article outlines the existing activities, support systems, and budgetary factors presently used under the traditional costing method, and the major problems associated with this practice. An illustration using the ABC method shows the allocation of direct and indirect costs for two separate academic courses, giving a visual of the differences in resources utilized, and emphasizing the distortions caused by the use of traditional costing. Through examples, the article outlines how ABC can be used to better...