An Instructional Case:

Cost Concepts and Managerial Analysis

ABSTRACT: This case is designed to help you develop a working understanding of

fundamental cost concepts (cost behavior, cost traceability, cost flexibility, and unit

costs) and the proper use of cost data for managerial analysis purposes. The case

narrative describes a business scenario and a problematic managerial analysis based

on certain cost data. The case requirements ask you to apply basic cost concepts to

analyze the cost data, evaluate the use of cost data in the analysis described in the

case narrative, and then effectively communicate the results of your analysis and evaluation in the form of a professional written memo.

Keywords: instructional case; cost analysis.

CASE MATERIALSINGLIS UNIVERSITY LIBRARY

Case Narrative

Inglis University Library maintains a small book donations department in the basement section of the library. The process for accepting the typical donated book includes searching the current holdings to determine if the book is already held by the library, placing a small inventory tracking device (a radio frequency identification [RFID] tag) in the book, assigning the book a card catalog number, and finally entering the book into the

library's online computer database/card catalog system. The process of accepting a collection of periodicals involves a similar process. When the current holdings search reveals that the library already holds the donated item, and when there is no need for duplicate copies, the items are set aside in a small storage area and offered for sale twice a year during end-of-semester book sales. Books that are not sold during the book sale are donated to charity. In the previous year, the library raised $1,000 from the bi-annual book sales. In recent years, the library's donations department has been quite active. Asenath James, the librarian responsible for the donations department, has become exceedingly effective at

soliciting donations from alumni, retiring academics, eccentric collectors, and estates all over the world. Many of the items are in-print texts that the library would otherwise have had to purchase at full price. However, some of the donated books are extremely rare or out of print and would be quite expensive if purchased by the library; some of her more recent acquisitions include obscure books on non-Euclidean mathematics, a first edition

copy of Robert A. Heinlein's Stranger In A Strange Land, a first edition copy of William Blake's Songs of Innocence and Experience, an almost complete historic collection of the pulp magazine Weird Tales, several rare manuscripts on ancient folklore, and a handwritten

manuscript containing what experts have authenticated to be the writings of Percy Bysshe Shelley. Her effort has, to some extent, compensated for the dwindling library budget and allowed the library to create and maintain an exceptional, albeit unusual, library offering. Moreover, the university library has acquired a unique academic reputation due to some of the rare holdings acquired through the donations department's efforts. Both academics and graduate students from other universities make use of Inglis University's peculiar library resources. Perhaps more importantly, the number of students seeking specialized graduate studies at Inglis (especially in the areas of literature, mathematics, and ancient folklore)

has increased significantly. There is some evidence to suggest that this is due, at least in part, to the increased visibility of the university, along with the research potential afforded by the unique resources accumulating at the university's library (due almost entirely to the

success of the donations department's activities). The Inglis University Library donations department is operated by the head librarian,

Asenath James, and a graduate assistant, Randolph Carter, a folklore student at Inglis University. The head librarian is a salaried position ($48,000 per year), and since Asenath currently spends approximately one-quarter of her time soliciting and processing book donations, one-fourth of her contracted annual base salary ($12,000) is allocated to the book donations department. The Inglis University Library is also allotted $5,200 per academic year in additional funds to support the library donations function. This meager sum is used to provide a graduate work-study student a stipend to assist Asenath in the donations department during the fall and spring semesters. Work-study students typically work 20

hours per week and are paid on an hourly basis at a rate of $10 per hour. A typical semester is 13 weeks long.1 Currently, Randolph is working all his allotted hours in the book donations department. If he were not fully utilized by the book donations department, he would work elsewhere in the university, as his work hours and stipend are guaranteed as a part of his financial aid program. In addition, the library has allotted a small space in the

basement of its main building for donations activities. The library allocates a portion of the library's general facilities costs ($1,200 per year). General facility costs include depreciation on the building, property taxes, insurance, general maintenance costs, and utilities. Since the library's catalog system is computerized, the only other applicable cost is for the RFID inventory tags, which are relatively minimal and run about $0.50 per book; these RFID tags are purchased by the library as needed.

Typically, Asenath and her assistant solicit and process an average of 1,000 books per academic year and can, without too much difficulty, solicit and process up to 1,200 books per academic year. However, each year for the past five years, the number of books donated

and processed for the library has increased noticeably. Unfortunately, Asenath, as head librarian, has library duties other than donations and cannot devote any additional time to the donations department. Randolph's current work-study contract is restricted to only 20

hours per week and only applies to the fall and spring semester. Asenath has no additional help during the summer months, which creates quite a backlog of unprocessed books going into the fall semester. Of late, Asenath and Randolph have begun to experience difficulty

processing the increasing number of book donations, and some recent acquisitions are still sitting in boxes on the floor of the donations department's basement space. Consequently, the library has approached the university budget committee with a request to increase the funds allotted to the book donations department by $5,000 per year. These additional funds would be used to employ part-time students to work an additional ten hours per week during the fall and spring semester, and to work 20 hours per week during the summer months2 to compensate for the increasing number of donated books. This would increase the department's annual capacity to approximately 1,900 books. Asenath can handle the

workload between semesters and during the holiday breaks herself with no additional help. Using the cost information provided by the library, the budget committee computed a unit cost per book of $18.90, calculated as follows:

Librarian salary allocation $12,000

Graduate assistant stipend $5,200

Facility cost allocation $1,200

Total costs $18,400

Per book (based on 1,000 books) $18.40

RFID tag per book $.50

Total unit cost $18.90

The committee has since denied the request for additional funds and expressed the following sentiments. ''First, the unit cost of $18.90 per donated book is already too high; an additional $5,000 per year would bring the cost per book to $23.90 per book, an entirely unacceptable cost for the processing of an old used book.

Librarian salary allocation $12,000

Graduate assistant stipend $5,200

Facility cost allocation $1,200

Part-time student help $5,000

Total costs $23,400

Per book (based on 1,000 books) $23.40

RFID tag per book $.50

Total unit cost $23.90

''Second, at the already-high cost of $18.90 per book, the library can hardly afford to accept more than 1,000 books per year; if, for instance, the library were to accept 2,000 books, it would cost the university $37,800. Finally, we have serious doubts as to the value of the donations department; if it were eliminated entirely, the university could save, at the very least $23,900 per year. These savings could be used to support some other, more

worthwhile function within the library.''

Librarian salary allocation $12,000

Graduate assistant stipend $5,200

Facility cost allocation $1,200

Part-time student help $5,000

RFID tags ($.501,000 books) $500

Total savings $23,900

1. Explain what is meant by an activity measure. Identify an appropriate activity measure for analyzing the cost structure of the book donations department within the university's library. Justify your answer. Is the activity measure you identified a true cost driver?

Explain.