ABC Group Assignment 2 Kolbec Community College (KCC) has 4,000 full-time students and offers a variety of academic 3 programs in three areas: professional studies, arts, and technology. The professional studies programs prepare students for administrative and clerical jobs in a variety of professional 6 5 settings, including accounting, medicine, and law. The arts program's offerings are wide ranging and include graphic design, digital animation, culinary arts, cosmetology, and music arts. The technology programs are also varied, including information technology, medical laboratory technology, electrical engineering technology, pharmacy technology, and natural resources technology. 7 8 9 10 The chief financial officer of KCC, Lynn Jones, has consistently emphasized to other members of 1 the 2 senior management team the importance of understanding the costs of delivering the various 3 academic programs. To that end, the costing system used at KCC tracks the direct costs of each 4 program, which are shown below on an annual basis, along with the number of fulltime 5 students: _6 7 Item 8 Full-Time Students 6 20 Professor's salaries 21 Administrative salaries 2 Supplies Professional Studies 2,000 Arts Technology 1,000 1,000 Total 4,000 $ 1,290,000 $ 662,000 $ 792,000 $2,744,000 111,000 73,000 73,000 257,000 46,000 156,000 53,000 255,000 166,000 103,000 86,000 355,000 287,000 156,000 181,000 624,000 $ 1,900,000 $ 1,150,000 $ 4,235,000 23 Teaching support 24 Facilities 25 Total direct cost 26 27 9 89 28 It is very important to understand the overhead costs consumed by each academic program at KCC in determining the full cost of operating the programs. Central administration at KCC allocates financial resources to academic programs based on the estimated full cost per student of delivering the Tho to ot KCC 7 8 9 0 1 It is very important to understand the overhead costs consumed by each academic program at KCC in determining the full cost of operating the programs. Central administration at KCC allocates financial resources to academic programs based on the estimated full cost per student of delivering the program. The overhead costs at KCC are significant, totalling over 60% of direct costs. Total annual overhead costs at KCC are as follows: 2 3 Cost 4 Adminisstrative salaries $ 930,000 5 Facility costs 6 Office expenses 7 Total overhead costs 8 9 1,340,000 310,000 $ 2,580,000 0 Traditionally, KCC has allocated overhead costs to academic programs on the basis of the number of Fulltime students in each program. This approach was deemed appropriate since Jones reasoned that increasing the number of students at KCC would result in higher overhead costs (e.g., more facilities would be needed, more indirect support costs would be incurred, etc.). However, Jones is beginning to question the accuracy of the traditional approach since it results in a similar full cost per student for the arts and technology programs, which she feels doesn't make sense. Based on her knowledge of the programs, Jones feels that the technology program is probably more expensive to deliver than the arts program, but this does not come through in the traditional costing approach. Jones recently attended a seminar on management techniques being used by leading educational institutions that, among other topics, covered the basics of the ABC approach. She likes the idea of being able to assign indirect costs to academic programs on the basis of how much of the support activity resources are consumed by each program. If Jones's instincts are correct in that some programs consume more resources of certain activities than others, this could have a significant impact on the overhead costs assigned to each under the ABC approach. Upon returning to KCC, Jones decides to implement ABC. She, along with Assistant CFO James West, begins by identifying the key activities used to support the teaching programs. Rather than getting too detailed with respect to identifying activities in the initial implementation, Jones decides to keep the process manageable and comes up with six key activities. Next, based on a series of interviews with various KCC employees who work in the departments covered by the identified activities, Jones and West estimate the percentage of the total administrative, facility, and office expense resources consumed by each activity. Again, to keep the process efficient, Jones rounds all percentages to the nearest 5%, figuring that a "close enough" approach will suffice for this initial implementation and recognizing that the estimates are subjective to begin with. The results are shown below: Activity Resource Distribution across Activities Administrative Facilities Office institutions that, among other topics, covered the basics of the ABC approach. She likes the idea of being able to assign indirect costs to academic programs on the basis of how much of the support activity resources are consumed by each program. If Jones's instincts are correct in that some programs consume more resources of certain activities than others, this could have a significant impact on the overhead costs assigned to each under the ABC approach. Upon returning to KCC, Jones decides to implement ABC. She, along with Assistant CFO James West, begins by identifying the key activities used to support the teaching programs. Rather than getting too detailed with respect to identifying activities in the initial implementation, Jones decides to keep the process manageable and comes up with six key activities. Next, based on a series of interviews with various KCC employees who work in the departments covered by the identified activities, Jones and West estimate the percentage of the total administrative, facility, and office expense resources consumed by each activity. Again, to keep the process efficient, Jones rounds all percentages to the nearest 5%, figuring that a "close enough" approach will suffice for this initial implementation and recognizing that the estimates are subjective to begin with. The results are shown below: Activity Central administration Informaiton systems technology Student counselling services Human resources Library operations Registrar's office Total Resource Distribution across Activities Administrative Facilities Office 20% 5% 20% 20% 15% 20% 5% 5% 5% 10% 5% 5% 20% 65% 35% 25% 5% 15% 100% 100% 100% P R S Working with key personnel from each of the six activities shown above, Jones and West then identify the activity measure and the quantity of that measure used for each teaching program. Fortunately, KCC implemented an enterprise resource planning system a few years ago, which is already tracking much of the information needed regarding the activity measures and the specific quantities for each academic program: T Activity Measure Professional Arts Technology Central administration Hours spent on program 6,000 7,000 7,000 Information systems technolog Processing hours 5,800 2,700 11,500 Student counselling services Number of students counselled 144 92 164 Human resources Library operations Registrar's office Required: Number of admin. Staff & faculty member Number of library circulations Fulltime students 21 15 14 7,000 3,500 3,500 2,000 1,000 1,000 1. Using the traditional approach to assigning overhead costs to academic programs: a. Calculate the predetermined overhead rate. b. Assign the overhead costs to each academic program using the predetermined rate. c. Calculate the total cost per student (direct costs plus overhead) of operating each academic program. 2. Using ABC, complete the following requirements: a. Complete the first-stage allocation of overhead costs to academic programs, using Exhibit 7-7as a guide. b. Calculate the activity rates for each of the activity cost pools, using Exhibit 7-8 as a guide. (Round your answers to 2 decimal places.) c. Using the activity rates calculated in (b), complete the second stage allocation of overhead to academic programs. 3. Based on the results of (2), calculate the total cost per student (direct costs plus overhead) of operating each academic program. (Round your answers to 2 decimal places.) A B C D E Team #: Team Members Participated: Req. 1: 1.a. Using the trditional approach to assigning overhead costs to academic programs: Predetermined overhead rate: Total overhead costs * Full-time students per student = 1.b Overhead costs assigned to academic programs: F G Professional studies: OH rate x # of stu. 1 2 Arts: Technology: 41.c Total cost per student: 5 Professional Studies Arts Technology Total 6 Professors' salaries $ 7 Administrative salaries 8 Supplies 9 Teaching support 0 Facilities 1 Overhead 2 Total costs $ $ $ w 4 Full-time students 5 Cost per student 6 6 7 7 8 9 Req. 2: Using ABC, complete the following requirements: 2.a. Complete the first-stage allocation of overhead costs to academic programs. Central Admin Info Systems Student Counseling Human Resources Library Operations Registrar's Office $ Administrative Facilities $ Office $ Total cost S $ $ $ $ $ $ Total A B 11 12 2.b. 13 D E F Caculate the activity rates for each of the activity cost pools. (Round your answers to 2 decimal places.) H 14 Activity Cost Pool Total Cost Total Activity Activity Rate 15 Central administration Program hours 16 Information systems technology 17 Student counselling services Processing hours Stu. counselled per hour per hour 18 Human resources 19 Library operations 20 Registrar's office # of faculty & staff Circulations Full-time students per student member circulation student 21 22 2.c. 23 Using the activity rates calculated in (b), compute the second-stage allocation of overhead to academic programs: Professional 24 Activity Cost Pool Studies Arts Technology 25 Central administration 26 Information systems technology 27 Student counselling services 28 Human resources 29 Library operations 30 Registrar's office 31 Total $ $ $ 32 33 34 A B 1 Team #: 2 3 Req. 3: 4 D E Team Members Participated: G H Based on the results of (2), calculate the total cost per student (direct costs plus overhead) of operating each academic programs. (Round your answers to 2 decimal places) 5 6 Professional Studies 7 Professors' salaries Arts Technology Total $ 8 Administrative salaries 9 Supplies 10 Teaching support 11 Facilities 12 Overhead 13 Total costs $ $ $ $ 14 15 Full-time students 16 Cost per student 17 18