Answers:
Several activities and cost drivers to be used for cost pools
In present era, educational institutions are significantly increasing due to current hike in the demand. Due to this factor, it has been fundamental for the administration staff of educational institutions to attain competitive advantage by making viable strategic as well as pricing decisions. For this aspect, educational institutions are required to determine suitable annual fees in order to attract new students as well as by retaining current students in an intensely competitive environment (Stefano and Freitas, 2014). Schools concludes their fee for education either on the basis of market trend or by making use cost based approaches. In this present task, we will consider the approach of cost-plus pricing. In the considered case, Art, Craft and music school can determine the fee by making addition of sufficient profit margin in their cost of resources utilised for providing educational services (Özkan and Karaibrahimo?lu, 2013). For this aspect, they can make use of Activity based costing (ABC) method in allocating indirect costs to cost objects for determination of the unit by generating the accurate data required by the administrating authorities.
Description of activities and associated cost with it
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Activities
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Associated costs
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Justification
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Art and craft activities
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· Stationery
· Fees to teachers
· Electricity and other basic arrangements
· Space to conduct activity
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For the conduct of these activities, school administration will be required to recruit qualified staff and then make a necessary arrangement so that class of art and craft can be conducted. It will require stationery and craft items to be used in class.
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Music activities
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· Music system and equipment
· Fees to teachers
· Electricity and other basic arrangements
· Space to conduct activity
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For musical activities, school staff will be required to purchase or arrange music system and equipment. For this separate teachers is to be recruited. However, they will be not recruited on fixed pay they will be paid per session.
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Learning activities
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· Electricity and other basic arrangements
· Space to conduct activity
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These are the general activities covered under the curriculum of the school. It will not require additional staff as admin staff has to make a basic arrangement so that activities can be conducted.
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Meal activities
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· Tools for cooking
· Salary to employee
· Payment to caterers
· Electricity and other basic arrangements
· Space to conduct activity
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Snacks have to be served on a daily basis, so payment will be made to caterers on a regular basis. Helper is to be recruited by admin staff to support teacher in the distribution of snacks. In order to conduct cooking workshop, necessary arrangements have to be made by being cautious with the health and safety aspects.
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Free play activities
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· Up keeping of outdoor grounds
· Game equipment
· Individual to supervise activities
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For this activity, school staff will be required to make arrangements for outdoor games so the student can play properly. Further, an individual will be recruited to supervise activities of students and management of equipment.
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Miscellaneous
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-
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For this activity, no specific cost has to be incurred by administration staff.
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Conferencing with parents
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· Sitting arrangements
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For this activity, no specific cost has to be incurred by administration staff except sitting arrangements.
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Cost and cost drivers
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Cost
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Cost driver
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Payment to staff
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On the basis of classes conducted for each activity.
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Electricity
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Frequency of classes and plug points used.
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Administration cost
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On the basis of classes conducted for each activity.
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Equipment for cooking
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Direct cost
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Game equipment
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Direct cost
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Rent
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On the basis of sq. ft. of space used for each activity
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Stationery
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As per its allocation for each activity
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Recommendations for development of better cost structure
- By considering the suitable cost drivers, cost of each academic course must be determined in order to set sufficient fee model to attract maximum students.
- Allocation of resources should on the basis of cost benefit analysis to ensure maximum profits and optimum utilisation of available resources (Ruiz-de-Arbulo-Lopez, Fortuny-Santos and Cuatrecasas-Arbós, 2013).
- Continuous evaluation of cost plans should be done to eliminate activities which are not adding value to the business.
- Changing of cost driver on the basis of utility of expense in business activities.
Potential benefits and cost of implementing Activity Based costing
Activity based costing is management accounting methodology used for tracking resource consumption and accurate costs of final output. In this method, resources are allocated to various activities, and activities are allocated to cost objects (Balakrishnan, Labro and Soderstrom, 2014). This approach is mainly focused on cost drivers of activities due to which cost is increased.
Benefits associated with activity based costing
Activity-based costing delivers an accurate method of costing of product and services provided by business entities through better decision can be made by management authorities related to pricing. This approach enhances understanding of overheads as well as cost drivers. With this aspect, management is able to identify costly activities that are not adding value to the business for elimination in order to make a reduction in cost and increment in profitability (DRURY, 2013). In addition to this, ABC also enables managerial parties in developing a better way for allocation and elimination of overheads costs. With this aspect, there is a direct improvement in the product as well as customer profitability analysis (Mitra, 2016). Further, it assists performance management techniques like constant progress in scorecards. The method also helps to fix the price of products or services that are excessive or incorrect. As a whole, by the implementation of this model there will direct improvement in product and service quality because data of ABC will specifics production and cost issues which is required to be resolved for effective business operations.
Cost associated with activity based costing
The major cost associated with the activity based costing is that it is difficult to set up specifically for business entities which are previous making use of traditional accounting methodologies. It is because; in this approach in-depth analysis of business activities is to be done, by breaking down into each activity’s components in an individual manner. This complete procedure will consume valuable resources of business as data collection, measurement and recording has to be done into the new system. In addition to this, educational institution may also require the support of a consultant who is specialized in the setup of an ABC system and can is able to provide training on its use. Spending on its software will be an additional cost for the implementation. However, it can be used for automation of manual aspects involved in using of ABC. Further, computation of cost of all activities is time-consuming as it required detail information (Balakrishnan, Labro and Soderstrom, 2014). In various case, cost driver of activity is not available as it is difficult to identify overall activities that influence the operational costs. It is not an easy job to determine suitable cost driver for allocation of cost related to operating activities. In accordance with the study of Kaplan and Anderson (2013), activity based costing is not suitable for the small manufacturing process as it enhances efforts of management authorities through which they can get distracted to the main objective of business.
References
Books and Journals
Kaplan, R. and Anderson, S.R., 2013. Time-driven activity-based costing: a simpler and more powerful path to higher profits. Harvard business press.
DRURY, C.M., 2013. Management and cost accounting. Springer.
Balakrishnan, R., Labro, E. and Soderstrom, N.S., 2014. Cost structure and sticky costs. Journal of management accounting research, 26(2), pp.91-116.
Ruiz-de-Arbulo-Lopez, P., Fortuny-Santos, J. and Cuatrecasas-Arbós, L., 2013. Lean manufacturing: costing the value stream. Industrial Management & Data Systems, 113(5), pp.647-668.
Stefano, N.M. and Freitas, M.D.C.D., 2014. Framework: Activity-based costing in services. Revista de Administração da UFSM, 7(1), pp.153-169.
Özkan, S. and Karaibrahimo?lu, Y.Z., 2013. Activity-based costing approach in the measurement of the cost of quality in SMEs: a case study. Total Quality Management & Business Excellence, 24(3-4), pp.420-431.
Mitra, A., 2016. Fundamentals of quality control and improvement. John Wiley & Sons.
Online
CGMA. 2016. Activity-based costing (ABC). [Online]. Available through < https://www.cgma.org/resources/tools/essential-tools/activity-based-costing.html>. [Accessed on 28th April 2017].
