Harvard Case - Activity-based Costing and Management
"Activity-based Costing and Management" Harvard business case study is written by Owen Hall, Charles McPeak, Samuel Seaman. It deals with the challenges in the field of General Management. The case study is 4 page(s) long and it was first published on : Sep 10, 2010
At Fern Fort University, we recommend that Fern Fort University implement an activity-based costing (ABC) system to gain a more accurate understanding of its cost structure and identify opportunities for cost reduction and improved efficiency. This will enable the university to make more informed decisions regarding resource allocation, pricing strategies, and strategic planning.
2. Background
This case study focuses on Fern Fort University, a private university facing financial challenges due to rising costs and declining enrollment. The university's current cost accounting system, based on traditional allocation methods, does not accurately reflect the actual costs associated with different academic programs and support services. This lack of accurate cost information hinders the university's ability to make informed decisions about resource allocation and pricing.
The main protagonists in the case are:
- Dr. David Bowman: The university president, who is concerned about the university's financial situation and wants to implement a more accurate cost accounting system.
- Dr. Susan Jones: The dean of the School of Business, who is skeptical about the need for an ABC system and believes that it will be too costly and complex to implement.
- Mr. John Smith: The university's chief financial officer, who is tasked with evaluating the feasibility and potential benefits of implementing an ABC system.
3. Analysis of the Case Study
To analyze the situation, we will use a combination of frameworks:
Strategic Analysis:
- SWOT Analysis:
- Strengths: Fern Fort University has a strong reputation and a dedicated faculty.
- Weaknesses: The university's current cost accounting system is inaccurate and inefficient.
- Opportunities: Implementing an ABC system could lead to cost savings, improved efficiency, and better decision-making.
- Threats: The university faces increasing competition from other universities and declining enrollment.
- Porter's Five Forces:
- Threat of New Entrants: High, due to the increasing number of online universities and the ease of starting new educational institutions.
- Bargaining Power of Buyers: High, as students have many choices of universities and are increasingly price-sensitive.
- Threat of Substitute Products: High, as online courses and other forms of education are becoming increasingly popular.
- Bargaining Power of Suppliers: Moderate, as the university relies on a variety of suppliers for its resources.
- Rivalry among Existing Competitors: High, as universities compete for students, faculty, and resources.
Financial Analysis:
- Cost-Volume-Profit (CVP) Analysis: The university can use CVP analysis to determine the break-even point for each academic program and identify programs that are not profitable.
- Activity-Based Costing (ABC): ABC can be used to identify the actual costs associated with each academic program and support service, providing a more accurate picture of the university's cost structure.
Operational Analysis:
- Value Chain Analysis: The university can use value chain analysis to identify areas where it can improve efficiency and reduce costs.
- Process Mapping: Process mapping can be used to identify bottlenecks and areas for improvement in the university's operations.
4. Recommendations
Fern Fort University should implement an activity-based costing (ABC) system to achieve the following objectives:
- Accurate Cost Allocation: ABC will provide a more accurate allocation of costs to academic programs and support services, allowing for more informed decision-making regarding resource allocation and pricing.
- Cost Reduction and Efficiency Improvement: By identifying the true cost drivers of activities, the university can identify areas where costs can be reduced and efficiency can be improved.
- Strategic Planning: ABC will provide valuable insights into the cost structure of different academic programs and support services, enabling the university to make informed decisions about its strategic direction.
- Enhanced Competitiveness: By improving efficiency and reducing costs, the university can become more competitive in the higher education market.
Implementation Plan:
- Form a Project Team: Assemble a cross-functional team with expertise in accounting, finance, operations, and academic programs.
- Identify Cost Drivers: Identify the key activities that drive costs at the university and determine the cost drivers for each activity.
- Develop Cost Pools: Create cost pools for each activity and allocate costs to these pools based on the cost drivers.
- Allocate Costs to Products and Services: Allocate costs from the cost pools to academic programs and support services based on their consumption of activities.
- Develop Performance Measures: Establish key performance indicators (KPIs) to measure the effectiveness of the ABC system and track progress toward achieving the desired outcomes.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The ABC system aligns with the university's mission to provide high-quality education and research. By improving efficiency and reducing costs, the university can better fulfill its mission.
- External Customers and Internal Clients: The ABC system will benefit both external customers (students) and internal clients (faculty and staff). Students will benefit from lower tuition costs, while faculty and staff will benefit from improved resource allocation and efficiency.
- Competitors: The ABC system will help the university to become more competitive by improving its efficiency and reducing costs.
- Attractiveness: The ABC system is expected to generate a positive return on investment (ROI) by reducing costs and improving efficiency.
Assumptions:
- The university is committed to implementing the ABC system and providing the necessary resources.
- The project team will be able to successfully identify cost drivers and develop a comprehensive ABC system.
- The university will be able to make necessary adjustments to its operations based on the insights gained from the ABC system.
6. Conclusion
Implementing an activity-based costing (ABC) system is a crucial step for Fern Fort University to address its financial challenges, improve efficiency, and enhance its competitiveness. By gaining a more accurate understanding of its cost structure, the university can make informed decisions about resource allocation, pricing strategies, and strategic planning.
7. Discussion
Other Alternatives:
- Continue using the current cost accounting system: This would be a less expensive option but would continue to provide inaccurate cost information, hindering the university's ability to make informed decisions.
- Implement a simplified version of ABC: This could be a less complex and costly option but may not provide the same level of detail and accuracy as a full-fledged ABC system.
Risks and Key Assumptions:
- Resistance to change: Faculty and staff may resist the implementation of the ABC system due to concerns about its complexity and impact on their work.
- Cost of implementation: The implementation of the ABC system could be costly, requiring significant time and resources.
- Accuracy of data: The accuracy of the ABC system will depend on the quality of the data collected.
Options Grid:
| Option | Advantages | Disadvantages |
|---|---|---|
| Implement ABC | Accurate cost allocation, cost reduction, improved efficiency, strategic planning, enhanced competitiveness | Resistance to change, cost of implementation, accuracy of data |
| Continue using current system | Less expensive | Inaccurate cost information, hinders decision-making |
| Implement simplified ABC | Less complex and costly | May not provide the same level of detail and accuracy |
8. Next Steps
- Form the project team: Within the next month, the university president should form a project team to oversee the implementation of the ABC system.
- Conduct a feasibility study: The project team should conduct a feasibility study to assess the cost and benefits of implementing the ABC system.
- Develop an implementation plan: Once the feasibility study is complete, the project team should develop a detailed implementation plan, including timelines, resources, and responsibilities.
- Pilot test the system: Before full implementation, the project team should pilot test the ABC system in a small department or program to ensure its effectiveness and identify any potential challenges.
- Full implementation: Once the pilot test is successful, the university should fully implement the ABC system across all departments and programs.
Timeline:
- Month 1: Form the project team.
- Month 2-3: Conduct a feasibility study.
- Month 4-6: Develop an implementation plan.
- Month 7-9: Pilot test the ABC system.
- Month 10-12: Full implementation.
By following these recommendations and implementing the ABC system, Fern Fort University can improve its financial performance, enhance its competitiveness, and achieve its strategic goals.
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Case Description
This case summarizes some of the challenges - managerial and technical - associated with transitioning to an activity-based costing (ABC) model. The primary objective of this case is to introduce the student to the rationale and mechanics behind the ABC accounting approach and to explore the untoward consequences of using traditional accounting methods.
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