Harvard Case - Grand River University Water Buffalos: Activity-Based Costing of University Sports
"Grand River University Water Buffalos: Activity-Based Costing of University Sports" Harvard business case study is written by Kun Huo, Ian Burt. It deals with the challenges in the field of Accounting. The case study is 14 page(s) long and it was first published on : Feb 7, 2019
At Grand River University, we recommend implementing an activity-based costing (ABC) system for its athletic programs. This approach will provide a more accurate and detailed understanding of the true costs associated with each sport, enabling the university to make more informed decisions regarding resource allocation, pricing strategies, and program viability.
2. Background
Grand River University is facing increasing pressure to manage its athletic program's costs effectively. The university's current cost accounting system, which allocates costs based on student-athlete headcount, is deemed inadequate, leading to distorted views of program profitability and hindering strategic decision-making. The case study highlights the university's desire to explore alternative cost accounting methods, specifically activity-based costing, to gain a more accurate picture of the financial performance of its athletic programs.
The main protagonists in this case study are:
- Dr. David Smith, the university president, who is concerned about the financial sustainability of the athletic program.
- Mr. John Jones, the athletic director, who is responsible for managing the athletic program's budget and operations.
- Ms. Mary Brown, the university's accountant, who is tasked with implementing a new cost accounting system.
3. Analysis of the Case Study
This case study can be analyzed using the value chain framework, which helps to identify the key activities involved in the delivery of athletic programs and their associated costs. The value chain for university athletics can be broken down into the following primary activities:
- Research and Development: Recruiting and scouting of potential student-athletes.
- Production: Coaching, training, and competition.
- Marketing and Sales: Promotion of athletic programs and ticket sales.
- Customer Service: Providing support to student-athletes, fans, and alumni.
- Infrastructure: Maintaining facilities, equipment, and administrative support.
Activity-based costing (ABC) is a more sophisticated cost accounting method that allocates costs based on the activities that drive those costs. This approach can provide a more accurate picture of the true costs associated with each sport by considering the specific resources consumed by each activity.
By applying ABC to Grand River University's athletic program, we can identify the following potential benefits:
- Improved cost allocation: ABC can more accurately allocate costs to individual sports by considering the specific activities and resources consumed by each program.
- Enhanced decision-making: By providing a more accurate picture of program costs, ABC can support better decision-making regarding resource allocation, pricing strategies, and program viability.
- Increased transparency: ABC can provide greater transparency into the costs associated with each sport, which can help to build trust and accountability with stakeholders.
- Improved performance measurement: ABC can provide more meaningful performance indicators, such as cost per student-athlete, cost per win, and return on investment.
4. Recommendations
We recommend that Grand River University implement an activity-based costing system for its athletic programs. This implementation should include the following steps:
- Identify the key activities: The first step is to identify the key activities involved in delivering each sport. This can be done through a collaborative process involving coaches, staff, and administrators.
- Determine the cost drivers: Once the key activities have been identified, the next step is to determine the cost drivers for each activity. Cost drivers are the factors that cause costs to vary. For example, the cost driver for recruiting might be the number of visits made to potential student-athletes.
- Collect cost data: The next step is to collect cost data for each activity. This data can be obtained from various sources, such as financial statements, budgets, and timekeeping records.
- Allocate costs to activities: Once the cost data has been collected, it can be allocated to the appropriate activities using the identified cost drivers.
- Calculate the cost per unit of activity: The final step is to calculate the cost per unit of activity. This information can then be used to determine the cost of each sport.
5. Basis of Recommendations
This recommendation is based on the following considerations:
- Core competencies and consistency with mission: Implementing ABC aligns with the university's mission to provide a high-quality education and athletic experience while managing resources effectively.
- External customers and internal clients: ABC can help to improve the university's understanding of the costs associated with its athletic programs, which can benefit external customers (fans, alumni) and internal clients (coaches, athletes).
- Competitors: Implementing ABC can help Grand River University to stay competitive by ensuring that its athletic programs are operated efficiently and effectively.
- Attractiveness ' quantitative measures: ABC can provide more accurate financial data, which can be used to assess the profitability of each sport and make informed decisions about resource allocation.
6. Conclusion
Implementing an activity-based costing system for its athletic programs will provide Grand River University with a more accurate and detailed understanding of the true costs associated with each sport. This information will enable the university to make more informed decisions regarding resource allocation, pricing strategies, and program viability, ultimately leading to improved financial performance and sustainability.
7. Discussion
While ABC is a valuable tool for cost management, it is important to acknowledge potential challenges and limitations:
- Complexity: Implementing ABC can be complex and time-consuming, requiring significant effort and resources.
- Data availability: Access to accurate and reliable cost data is crucial for the success of ABC.
- Resistance to change: Some stakeholders may resist the implementation of ABC due to concerns about its complexity or the potential impact on program budgets.
Alternative options to ABC include:
- Traditional cost accounting: This approach allocates costs based on student-athlete headcount, but it can provide a distorted view of program profitability.
- Hybrid costing: This approach combines elements of traditional cost accounting and ABC, providing a more balanced approach.
8. Next Steps
To implement ABC successfully, Grand River University should take the following steps:
- Form a task force: Establish a task force consisting of representatives from the athletic department, finance department, and faculty to oversee the implementation of ABC.
- Develop a timeline: Create a detailed timeline for the implementation process, including milestones and deadlines.
- Pilot test: Conduct a pilot test of ABC in a few selected sports to test its effectiveness and identify any challenges.
- Train staff: Provide training to staff on the principles and application of ABC.
- Monitor and evaluate: Regularly monitor and evaluate the effectiveness of ABC and make adjustments as needed.
By taking these steps, Grand River University can successfully implement an activity-based costing system that will provide valuable insights into the costs associated with its athletic programs and support informed decision-making for a more sustainable and successful future.
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Case Description
On April 30, 2018, the athletic director of Grand River University was drafting a plan for his department to be reviewed by the school's board of trustees. Grand River University was a small university supporting several varsity sports teams that competed regionally and nationally. The men's hockey, men's basketball, and women's basketball programs had struggled in recent years. In fact, the women's hockey program had been cut several years earlier. The school wanted to reduce the athletics program's dependence on grants. With the university facing increasing costs and stagnant revenue, the athletic director had to provide information that clearly outlined the cost to the school of each program and athlete. A group of researchers had used activity-based costing to show that the actual cost of having a team was much higher than schools had reported. The athletic director wondered what his school's costs would look like after applying that method to his calculations.
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