Benefits and challenges
Noor Azizi Ismail, College of Business, Universiti Utara Malaysia, Sintok, Malaysia
Purpose – The purpose of this paper is to discuss how activity-based costing (ABC) technique can be applied in the context of higher education institutions. It also discusses the obstacles and challenges to the successful implementation of activity-based management (ABM) in the higher education environment.
Design/methodology/approach – This paper adopts a combination of case study and survey approaches. It also uses SAS ABM software to transform the ABC model into a working model.
Findings – The results demonstrate that, using SAS ABM software, implementation of ABC technique can result in improved information of benefits to the university administrators. However, several obstacles and challenges especially those relating to supporting information systems may hamper the success of ABM system implementation.
Originality/value – This is the first paper that investigates the feasibility of ABM system implementation in higher education institution in Malaysia. It is also the first to use specific software to transform the ABC into a working model.
Malaysia; Universities; Activity based costs; Activity based management.
Campus-Wide Information Systems
Emerald Group Publishing Limited
There is a widespread recognition that the world is changing and higher education is one area facing unprecedented challenges. Digital revolution is one development that has fundamentally changed higher education institutions. In response to this rapidly changing environment, higher education institutions need to take necessary actions to pursue opportunities presented by these challenges, as well as responding positively to the challenges. Universities need to invest heavily in information and communication technology (ICT) projects such as e-learning and to develop comprehensive campus information systems to help them achieve their strategic objectives better. These efforts, however, will further contribute to the rising cost of higher education. Therefore, effective cost management system is crucial as it could provide university management with the right information and feedbacks necessary to create value for the institutions (Cox et al., 1999). Managing modern universities is a big challenge nowadays as university leaders must strive to work on controlling costs while aggressively working to address high-quality education. For this purpose, universities need to find a methodology that can link accounting data to the university strategic plan as well as performance measures (Qayoumi, 1996). Activity-based costing (ABC) is one alternative costing method as it could accurately determine the true cost of providing product or services (Robertson et al., 1998). Gordon and Charles (1998) reported several universities in the UK that used ABC found ABC information has helped them with tighter financial management and resource allocation. While many universities in developed economies have implemented ABC as a decision support system (Robertson et al., 1998; Cox et al., 1999; Granof et al., 2000; Whelan, 2008; Hubbard, 2008), this method is still an alien to most universities in Malaysia.
This paper discusses two important issues relating to ABC. First, it discusses how ABC technique can be applied in the context of higher education institutions in Malaysia. Second, it discusses the obstacles and challenges to the successful implementation of ABC in the higher education environment. To test the feasibility and value of ABC in a university environment, this study uses SAS activity-based management (ABM) software to transform ABC paper model into a working model. The ABC model was developed based on activities of an academic department, Faculty of Accountancy (FAC) of a public university in Malaysia. Several reasons justify, why a faculty and not a university is chosen as a subject for this study. First, university costs are as much affected by decisions made at the faculty level as at the university level. Second, for a pilot project like this, it is thought that the accounting system of a faculty is more manageable and within the resource constraints of this project, whereas a university consists of an extraordinarily wide range of organizational units and thus activities. Finally, FAC is specifically chosen among other faculties as the majority of faculty members are already having a good understanding of ABC method.
The literature review is divided into three sections. The first section provides an overview of traditional cost management (TCM) system. The second section discusses, the differences and advantages of ABC/ABM system over TCM system. Finally, the third section explains how ABM system can assist higher education institutions achieve their strategic goals.
Traditional cost management
In many organizations, financial accounting information remains the primary source of management information (Garrison and Noreen, 2000). However, as Johnson and Kaplan (1987, p. 1) observed, “today's management accounting information […] is too late, too aggregated, and too distorted to be relevant for managers' planning and control decision,” The reason is TCM system focused on managing cost by means of cost-based budgets, standards and variances, established at the departmental or unit level (Qayoumi, 2008). In such a system, many of the volume-sensitive cost drivers are attached to the overhead costs as an economical means of ensuring a proper match between revenues and expenses. This approach tends to over- or underestimates the costs of products/services based on misleading measures, thus resulting in erroneous decisions (Cooper, 1988). Recently, organizations need to focus on processes and activities costs, as well as performance measurements for quality attributes such as customer satisfaction, reliability, cycle time, flexibility, and productivity. The critical success factor of any organization require continuous involvement in managing all activities to ensure that a high-quality service is provided in the most efficient and effective manner. This means that using generally accepted accounting principles are not useful in planning, managing, controlling, and directing activities, because they do not provide information on how an activity is accompanied (Qayoumi, 2008).
Activity-based costing and management
There is a growing body of literature which argues that, compared with TCM, ABC offers important advantages to organizations. Despite its slow diffusion rate, ABC is now an accepted element of the accounting and control systems of industrial and service firms (Granof et al., 2000). Basically, ABC is a method that is designed to provide managers with more accurate product/service costs, clearer insights into what causes costs to exist and what drives costs and more relevant information for strategic decision making (Beaujon and Singhal, 1990). In other words, ABC provides a focus on activities not visible through traditional accounting. With this information, managers can make better decisions about “what happens in the business?,” “who does what in the business?,” and “what do activities cost?” (Mahoney, 1997). ABM, on the other hand, refers to the use of ABC information to understand and to make beneficial changes in the way institutions do their business in an environment of limited resources and increasing demands. It is a strategic tool that allows managers to: quantify the value of products and services; use a common language for benchmarking; look at their activities with a process view; and choose courses of action based upon ABC information. Moreover, other management initiatives such as balance scorecard and performance management draw upon the knowledge created by ABC (Khalid, 2005).
ABM in higher education institutions
According to Robertson et al. (1998, p. 15), service organizations such as universities need costing systems to perform three primary functions: “financial reporting for management and statutory purposes; understanding the costs of activities, products, services and customers; and providing feedback and insights to management on what causes costs.” They further argues that ABC appears to be the only tool that currently is able to deliver information to service sector organizations that satisfies the last two of these primary functions. Public universities like other public sectors have a tradition of managing operations through budgetary control of cost centres (Granof et al., 2000). Financial performance is measured by comparing actual and budgeted results, where most of the costs of a particular cost centre come from resources that have been committed in advance. This simple financial practice has led to university management not having accurate knowledge of the costs of the products/services that are provided or the cost of different student types enrolled. With ABC, university can gauge the amount of resources that are consumed by individual cost centres and customers and by the activities and processes that deliver the products to customers.
Background of case study
This case applies the concept of ABC technique to the business activities of an academic faculty (FAC). For this purpose, SAS ABM software is used to transform the ABC model into a working model. FAC is a large academic unit with over 120 lecturers. It offers two undergraduate degrees, five master degrees and a doctorate degree. Total student enrolment was 3,952, consisting of 3,055 undergraduate, 67 postgraduate and 69 PhD students. The largest undergraduate classification of students was local students with 3,780. The international students numbered a mere 36. Of the Master and PhD students, half were international.
The main objective of this study was to develop an ABC model that can be used by public universities to estimate the costs of academic programs. Figure 1 shows the conceptual model of the study. The steps taken to implement the ABC model are discussed.
Step 1 – obtain expenditure data
The first step in implementing the ABC model was to obtain annual expenditures for the fiscal year 2007. FAC receives its resources from the university based on its annual budgeted funds. Table I provides a breakdown of FAC expenditures. The largest was salaries and allowances with almost RM7.8 million in annual expenditures or 87 percent of the RM8.8 million totals.
Step 2 – identify resources
Expenditures reported in Table I represented the resources to be assigned to the identified activities.
Step 3 – identify activities
As typical in many universities, academic staffs engage in four broad categories of activities: teaching; research; publication; and consultation. In addition, academic staffs are expected to serve in other service activities such as journal editorial board member and committee of academic and professional bodies. Occasionally, academic staff also attended workshops and presented papers in seminars and conferences. Several academic staffs also hold various administrative positions. Finally, academic administrators and administrative staff members usually involve in other service and administrative-related activities. Table II provides a breakdown of six activity pools and activities performed by academic and administrative staffs of FAC.
Step 4 – identify resource drivers and resource driver quantities
The resources costs will be assigned to relevant activities in six-activity cost pools via identified resource driver and resource driver quantity. A resource driver is a measure of the quantity of resources consumed by an activity. An example of a resource driver is the percentage of effort a lecturer spends across the various activities performed. Examples include lecturing, academic advising and supervision, undertaking research and consultation and publishing books. For this purpose, academic staffs were first pooled according to their rank: professors, associate professors, senior lecturers, and lecturers. The reason is that each category of academic staff is expected to spend their times differently on each activity, which are reflected by different quantity of resource driver to each assignment. As illustrated in Table II, each activity pool comprises of several activities. Teaching activity comprises of lecturing, academic advising, and academic supervision. For each category of academic staff, the resource driver quantity will be different. For example, while lecturers and senior lecturers spend most of their teaching activity giving lectures to undergraduate classes, professors, and associate professors devote their teaching times giving lectures to postgraduate classes and supervising Master and PhD students. Similarly, associate professors are expected to devote more time publishing articles in academic journals compared to senior lecturers and lecturers. If an academic staff, in particular professors and associate professors, also holds administrative positions such as Dean or Head of Department, the resource quantity driver (percentage of efforts) need to be adjusted accordingly.
A questionnaire survey was designed to determine, the resource driver quantity for each activity of each category of lecturers. For each category, ten lecturers were randomly selected to answer questions relating to the percentage of efforts that they spent on each activity. The percentage of effort of each activity for each category of academic staffs was then totalled and divided by the number of responses in each category to calculate the average percentage of effort for each activity and each category of academic staffs. Similar procedures were carried out for academic administrators and administrative staffs.
Step 5 – assign resources to activities
The first step is to assign resources to each activity pool using “inter-module” assignments. Results in Table III indicate that the highest activity costs was teaching (RM2,646,823), followed by, in descending order of costs amount, research (RM1,001,425), administration (RM830,962), publication (RM821,153), service (811,179) and consultation (RM336,538) activities. These activities costs data can be used by the faculty and/or university administrators to measure the performance of activities performed by the faculty.
It is important to note that, service and administrative are activities that support the faculty main activities: teaching, research, publication, and consultation. Therefore, the assigned costs of both service and administrative activities need to be re-assigned to those four main activities using “intra-module” assignments. In this case, the costs were assigned to the category of “others account” of each activity, using percentage as the activity driver.
After re-assigning the costs of services and administrative activities to the main activities, the next step is to reassign the costs of several main activities that have reciprocal relationships such as research, consultation and publication activities. For example, completed research would lead to publication. Similarly, knowledge gained from undertaking research and publishing articles and books would boost the reputation of the lecturers and thus increase their opportunity to receive a consultation project. Therefore, some of the costs incurred in conducting one activity (i.e. research) need to be reassigned (using intra-module assignments) to other benefiting activities (i.e. publication and consultation). Similarly, experiences gained from undertaking these three activities would further enrich the knowledge of the lecturers, whom will share their knowledge and experiences with their students as their ultimate beneficiaries.
Finally, assigned costs from research, publication, and consultation activities need to be reassigned to the respective teaching activities accordingly (details of breakdown of costs of each activities pools before and after intra-module assignments are available from the author upon request). These activities costs, when divided by the number of outputs would yield the unit costs of each activity. For example, if academic staffs published ten articles in academic journals during the year 2007, the unit costs of publishing an academic journal for the year 2007 would be RM79,471 (RM794,711/10). Similarly, if academic staffs submitted a total of ten research proposals during the year 2007, the unit costs of preparing a research proposal would be RM45,921 (RM459,208/10). The information can be used by the faculty administrator to compare the performance of its core activities with other faculties (details of resources, resource costs, resource drivers, resource driver quantities, activity pools and activities identified in this study are available from the author upon request).
Step 6 – identify cost objects
The ultimate aim of this study was to estimate the costs of academic programs and the costs of student per program. Therefore, the cost objects identified in this study are programs and students.
Step 7 – Identify activity drivers and activity driver quantities
Finally, the total costs of teaching activities (RM6,448,079.86) will be assigned to the respective programs using the number of students that are enrolled in each program as the driver. However, different weights were used to assign the costs for local and international students. In this case, a higher weight was used for international students as it is assumed that international students would normally need more guidance and attention (details of breakdown of activity costs, activity drivers, cost objects, driver quantities and weight used for this purpose are available from the author upon request).
Step 8 – assign activities to cost objects
Table IV summarizes the costs per program and per student. The data shows that the highest cost for program was undergraduate, followed by PhD and Master. For the undergraduate, Bachelor of Accounting (Honours) represents about 80 percent of the total undergraduate costs. For costs per student, the highest cost per students per program was PhD student. It is also important to note that the cost per student for international student is higher than the local student. While the fee for local undergraduate students is determined by the government, the costs data could be used by the university administrators to determine the appropriate fee for Master and PhD students, including international undergraduate students. It is important to note that the weight used to determine the flow of costs from teaching activities to the cost objects can be adjusted accordingly to reflect the teaching burden of different student types.
Table V shows the comparison between traditional reporting and ABC reporting. As exhibited in Table V, cost information presented in a traditional, account-oriented fashion provides information about the costs of resources being supplied to make it possible to carry out the faculty/university mission. Compared to the traditional reporting, an ABC perspective on the same data provides previously unavailable information about what the faculty and university is getting for their money. It provides managerial information useful in assessing the faculty's efficiency in teaching, research, publication, consultation, services and administration activities. This information, unquestionably, can be used by university management as a basis to make budget allocations among faculties, programs and activities. If ABC is implemented across all public universities in Malaysia, the same information can be generated and used by the Ministry of Higher Education to make appropriate budget allocations among universities according to their core businesses (teaching, research, publication and consultation), or even used the information as a basis to classify the universities as either a research or a teaching university. While results of this case study provide interesting insights of what ABC information can do to help faculty or university management make decisions around its core businesses, it is important to note that the results discussed in this section cannot be generalized beyond the faculty to which the model is applied. The model used simplified drivers and driver quantities for assignments exercises and did not include some relevant university costs. Therefore, they may not provide accurate and details costs information, as they should. Nevertheless, they are of interest because, for the first time, they point to the types of findings that application of the model can produce and to classes of issues and challenges that can be encountered in Malaysian universities environment.
Issues and challenges
The process employed for accomplishing this ABM system implementation brought to light several obstacles. The first obstacle encountered was obtaining financial data from relevant departments. Authorization to use the financial data is also an issue. Much of data required for performing the study were either unavailable or confidential, especially expenditures relating to salaries and allowances. For example, Bursar department initially expressed reservations about releasing individual salary and allowance data. The data are necessary to reclassify salaries and allowances according to the rank of academic staff members before assignment to the relevant activities could be made. However, the department finally released and gave the approval for use of the data after understanding the purpose and design of the study and being assured that the data would be kept confidential to the extent possible or reported in aggregate.
A second obstacle encountered was to accurately determine the academic staff salaries and allowances. Salaries and allowances are assigned to each academic staff member's faculty, yet in few instances, an academic staff may also teach one or more courses offered by other faculty and vice versa. Furthermore, several academic staff members, while serving the faculty, also held administrative position in other department or centre. However, the corresponding costs are not charged to those faculties or departments/centres. In this case, an assumption was made that all costs incurred by the target faculty, i.e. FAC, were incurred solely by that faculty and for the purpose of performing activities within the faculty.
A third obstacle encountered was to accurately determine the percentage of effort performed by academic and administrative staff members on identified faculty activities. For this purpose, a questionnaire survey was designed and distributed to a sample of academic staff members to determine the average percentage of effort for each activity of each category of academic staff. In this case, an assumption was made that all academic staff in the same category would spend the same amount of time on the same activity.
A fourth obstacle encountered was to determine appropriate resource driver quantity for the operating expenses. For example, the common driver used for assigning maintenance costs to activities is square feet. However, the unavailability of square footage data forced the researchers to use a simple percentage as the driver. In this case, discussions with several administrative staff members and researchers own experience was used to determine the appropriate driver quantity for each operating expenses.
A fifth obstacle encountered was to acquire the necessary operational data. Some data such as the number of students enrolled, and the number of staff member employed, were readily available. However, operational data relating to some departments or centers were not as readily attainable. While the initial plan was to include the costs of both faculty and other main servicing departments such as library, academic affairs department, research and innovation department and computer centre, the unavailability of these operational data lead to the abandonment of the plan. Getting cooperation from the respective departments was also a frustrating problem. For future studies of university costs, it may be preferable to assemble a cross-functional team consisting of members from all relevant departments or centres to avoid the problem.
The final obstacle encountered in this study was to obtain necessary data to measure activity performance. ABC approach provides important information useful in assessing FAC's efficiency in teaching, research, publication, consultation activities. The costs data could be used to compare the FAC's performance in each activity with other faculties in the university. For example, the costs of preparing proposals when divided by the number of research proposals submitted would give the costs of preparing a proposal. Similarly, the costs of publishing articles in academic journals when divided by the number of articles published in academic journals could be used to calculate the cost of publishing an article in an academic journal. Unfortunately, the faculty and research and innovation department did not keep track of the needed data.
In a nutshell, the accounting and information system of FAC, which is part of the university campus information systems, is insufficient to support ABM system effort and would require a major overhaul before it would be able to do so. Like the systems of many public universities in Malaysia, the university campus information systems focus on transaction processing system, but lack emphasis on analytical processing system. In other words, the systems are not designed to provide management-related information (please refer to Ismail (2008), for discussions on IT governance, funding and structure issues facing public universities in Malaysia), and certainly did not capture necessary data to “cost out” activities or programs. Therefore, distributing/assigning costs between faculties and departments (inter- and intra-module) may not be possible without sufficient supporting data.
Implications and future research opportunities
The importance of sufficient planning prior to implementation of an ABM system became apparent to the researcher. The team charged with performing the study must clearly understand the cost objects to be measured, which in this study are programs and students. In addition, financial and academic administrators must support the study. This means affected individuals must be willing to devote the necessary time, share the required data or assist in acquiring it, and provide other assistance or resources that are needed for a successful study. Also revealed was the importance of ensuring that issues are understood and adequately resolved by all parties prior to commencing. Furthermore, all parties must agree to alternative procedures to be employed. For example, if cost data are unavailable, will estimates be used? And if so, how will such estimates be made?
Relating to the future research opportunities, this study may be used to obtain a better understanding of the benefits, limitations, and obstacles associated with utilizing ABC concepts in a higher education environment. The model developed and demonstrated in this study can serve to further research on the application of ABC concepts, particularly the use of appropriate cost drivers, in the evaluation of academic programs and other academic activities. While most previous studies, including this study, focused on one particular faculty/department, future research may expand the scope of the study to include several faculties/departments for comparisons. Other interesting issues include: does fund accounting system used in higher education hinder ABM system implementation to the extent that the time and effort necessary to generate needed data negates the expected benefits of a cost study? To what extent does campus information systems supported the ABM system implementation? To what extent does ABM system implementation simplify the implementation of performance measurement system of a university?
Higher education sector will see a significant difference between the past and future trends. Changes will occur more frequently, more intensely, and in a more competitive, global environment. ICT revolution will radically transform universities, causing a redefining of students, academic and administrative staff members' roles, needs and expectations. The establishments of private universities and twinning degree programs with renowned foreign universities, which offer first class facilities and tailor-made programs further add to the challenges facing public universities. The management of public universities thus needs to embark on a more effective cost management system that are flexible, timely and provide information critical to support their decisions. As evidenced in this study, ABC methodology is one important alternative for public universities to consider to covert to competitive entities. While a more comprehensive study, possibly with the help of a consultant and a more comprehensive university information systems to seed the necessary information, would provide a more meaningful and conclusive ABC model for universities, public universities is urged to travel in the direction towards which this paper is pointing. This is important, as the achievements of public universities in the next decade will be measured in large part, by the way, university management manages costs and effectively uses them to make right management decisions.
Figure 1ABC conceptual model
Table IBreakdown of expenditures
Table IIActivity pools and activities
Table IIIActivities costs
Table IVCosts per program per student
Table VComparison of traditional and ABC cost reporting
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About the author
Noor Azizi Ismail is an Associate Professor at College of Business, Universiti Utara Malaysia. He holds a Bachelor Degree (Accounting), a Master degree (Accounting Systems), and a PhD (Accounting and Information Systems). He is also a Certified Management Accountant (Australia). His current research interests include accounting and information systems in small businesses, the interaction between organisational issues and technical factors in information systems development, IT governance issues and management accounting systems such as activity-based management and performance measurement. Noor Azizi Ismail can be contacted at: firstname.lastname@example.org