Activity Based Costing differentiates from traditional costing system from the very first step of costs allocations. Traditional costing system in the 80's has been perfectly adapted to manufacturing industries which were purely based on the direct labour & material costs, with overheads being kept to the minimum. Introduction of ABC changed the approach to costs by concentrating on the activities in place instead of separation of costs according to businesses departments. This method could be probably applied to most private sector businesses in a logical way - estimation of costs based on inputs required to generate the output (product). Management will benefit from clear step-by-step cost review when it comes to efficiency testing of at each level of activity. How this approach can be implemented in the public sector and, most important, why? These sorts of organisations are widely known for providing various services to every member of each society. It is not selling products followed up by marketing campaigns, but instead uses public resources (coming mainly from taxes) to administer and satisfy basic needs of taxpayers. In current economic climate when government imposes significant budget cuts across the public sector, it is advisable for these bodies to base future financial planning as per services that they provide. Will ABC help to identify & eliminate "bureaucracy, absence of strategic action, wastefulness of management of public resources" (Vazakidis, A 2010)?
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How ABC can be considered as a useful accounting system in Higher Education sector? Is it essential to explain the steps of ABC implication. The main difference from traditional accounting is classification of costs. Product costs could be linked to a particular course (for ex BSc Degree in Management), while period costs would be relating to costs incurred during the length of this course. At this stage, accountants would have to analyze costs as equipment, staff, consumables etc. In extreme situation period costs could not be simple to forecast for further years, since if 50% of group of students would fail to progress to a further year, particular course for repeating students would be more expensive as it would require more lecturers & additional rooms. Another wazny impact in this matter will definitely have upcoming budget cuts in the HEFCE funding (Higher Education Funding Council for England), which can result in removal of particular courses & decreasing number of students linked to increase in tuition fees. Universities applying ABC will benefit in such case since it will be easier to review internal activities by analysis of costs linked to particular courses. Any courses which wouldn't be profitable as from 2012/13 academic year can be eliminated from the offer, and with the ABC approach all direct product costs review and removed if not necessary. At the same time indirect (shared) costs could be minimized just to satisfy the needs of other courses. This would apply to any administrative departments as registry, finance & helpdesk.
Second element when applying ABC would be identification of outputs, which are "the desired end results" (Takitonda, Takitonda 2001). It would have to consider all courses, research papers, publications, events etc. Further required step is to identify activities (teaching, library services, admissions etc), which are at the later stage assigned with resources. Each university would have to group activities into activity pools, such as teaching (lecturing, academic advising and supervision), research (proposals and undertaking research), publication (academic/professional journals), consultation, services (university/faculty/professional services and professional development) and administration (academic and general) (Ismail 2010). During the allocation of resources to above activities, a number of difficulties might arise. As per Cropper, Cook 2000 it is hard to estimate the allocation of staff time used to perform particular activities. It is simple to calculate number of lecturer hours consumed on courses, but when it comes to checking assignments or time spent on running research project, it would require preparation of timesheets and tight control of academic staff to complete them as they go through the day. Considering lecturer's/researcher's role at the university, how relevant to his tasks is to keep track of period required to complete each activity. It would be advisable to employ number of accountants which would keep track of this by attending and estimating czas jaki oni na tym spedzaja. It means that to zdobyc accurate figures for the resource driver allocation, additional administrative staff costs would have to be involved. Academic staff cannot be required to have accountant's approach to their tasks on a daily basis. On the other hand, consumption of resources such as equipment, rent, utilities and accommodation can be perfectly estimated, so it can be said that at this stage ABC can offer number of benefits, with the main problem in allocation of academic staff costs between various activities. And this problem will unfortunately have very big impact on the costs allocation, as in Ismail 2010, 87% of total expenditure relates to salaries and allowances. What is more interesting, 65% of those salaries were for the teaching & research staff. Coming back to the HEFCE funding cuts on the way, some universities are estimating need of up to 10% cut across the staff costs. While ABC is not offering accurate costs in this sector, would it be advisable to use this approach in current economic climate?
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Mitchell, 2004 explains the results of survey conducted in UK Universities back in 1994, by grouping universities into ABC and non-ABC respondents. Complexity of this approach is the main issue reported in practice with number of other concerns involved in their response. It has been mentioned that the time and cost of implementation might not be beneficial in the end, explaining staff the methods, reasons and possible benefits of this change, as well as already earlier mentioned activity analysis, mainly the staff time. This approach could be definitely easier to implement in small university which is running limited number of courses where academic staff is skierowany mainly into one direction of the courses (for ex London School of Hygiene & Tropical Medicine). Introduction of ABC in such institutions should be cheaper, easier and can gain number of financial benefits when it is required to reduce the overall costs. But at the same time staff morale can be strongly affected, as effectiveness of every employee will have to be measured as accurate as possible. It might lead to false self-reports provided by the participants, and result in professional and leading teaching and research staff to leave the institution. On the other hand, high number of universities responded to the ABC method as very beneficial. Majority of institutions were interested in this approach mainly to efficiently allocate overheads, not to estimate the costing of courses.
Number of benefits has been recorded between universities, which in reality are nowadays a "supplier of range of products which have to be sold in competitive market" (Cropper, Cook; 2000). How this should have been applied to the current economical situation, which forces majority of universities to charge anything between £6,000 and £9,000 for one year of each undergraduate course? To remain competitive on the market, each price of the course has to be cost efficient to ensure that the right price will be set as of 2012/13 academic year. ABC benefits institutions because it expands the price forecasting into details of which elements can be made redundant (for ex number of administrative staff exceeding the needs) and which ones are definitely required as they can be shared between the product costs (lecturers, seminar tutors). Also, it has to be mentioned that setting up the price too high might result in the drop of product sales, but at the same setting up the price too low can increase the risk of incurring losses. Due to the public cuts and increasing tuition fee, universities might first time ever face the situation where the number of applicants will be under the capacity of the university. Therefore ABC would allow forecasting the minimum price which has to be charged, so that there will not be any financial surprise in case of decreasing number of student. The only universities which should not worry about this sort of difficulties are those with exclusive offer of courses, for ex The Royal Veterinary College which is the only college in London offering veterinary courses. Demand for their courses will be always so high that they should be able to charge the maximum fare proposed by the government. It can be argued that a notice of upcoming budget cuts is so short, that the ABC implementation would not be able to provide great financial management advices. ABC is not an accounting method which can go "live" within couple of months of even years. It would have to be run in the background together with the current accounting model, what could be expensive (additional staff dedicated to implementation) as well as could cause number of internal arguments between the academic staff and accounts department, since this method will require active participation of the whole institution. Even with the finance staff understanding the need of new system in place, the difficulty can arise in reporting methods - technical switch from number of spreadsheets existing for years into completely new way of looking at costs will not be simple and easy to use unless a financial model will be able to clearly capture every activity within the organisation.
Table 3 (Takitonda, Takitonda 2001) represent the method of forecasting the course costs, analysing step by step each activity consumed in the process. The example represents two different academic units (departments) which different requirements in regards to the cost element units. How management accountant can advise the directors in regards to the prices of each course? As per above table, product offered by the Academic Unit #2 is twice as expensive as the product from the Academic Unit #1, offers lower number of courses and attracts less students. But at the same time consumes very high number of Computer Use units - it is very likely that this department is offering degrees in Computing, while A. U. #1 consuming less Computer Use units, but requiring more Facility units (lecture rooms) and attracting more students could be representing for ex. Management Degree students. Exact analysis of those units helps in the total cost per course estimation.
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