Activity-Based Costing

In reality, many ODL institutions deliver a range of products or services such as:

• study materials or courseware (both text-based and in other media),
• courses,
• research and consultancy services,
• public services.

In order to make an accurate determination of the unit costs of these different products, it is necessary to identify all expenditure associated with each of them.

The Activity-Based Costing (ABC) approach was outlined briefly in Unit 4 in the context of assigning and attaching overheads to different products or services. It is based on the assumption that cost objects cause particular activities (or work) to be carried out. These activities, in turn, incur costs. An ABC exercise involves first identifying and analysing all costs associated with an activity and then assigning and attaching these to the cost objects.

Because the multiple functions of ODL institutions result in a range of outputs, it is necessary to identify all of the cost objects it produces and arrange these in a classification scheme, referred to as a taxonomy. Since some cost objects (such as study guides) are only part of larger cost objects (such as subjects or courses), they are normally arranged hierarchically. This means that they are ranked in order from specific to general or from simple to complex. Such a hierarchical taxonomy of cost objects is a useful starting point for an ABC analysis of what is produced by ODL institutions.

Figure 5a provides an example of a hierarchical taxonomy of cost objects at the Namibian College of Open Learning (NAMCOL). It resembles a pyramid laid on its side and is divided into five columns, each one representing a different level in the hierarchy:

• Level 1 - The Institution as a Whole
• Level 2 - Programmes (and other major areas of activity)
• Level 3 - Courses (or publication series)
• Level 4 - Modules, Subjects or Projects
• Level 5 - Component Elements

On the left-hand side of the diagram is a box representing the organisation as a whole, with its regulatory and logistical sub-systems above and below. At the next level to the right are the various programmes or other major areas of activity, including NAMCOL’s Computer-Based Learning Centre, the Alternative Secondary Education and Professional/Vocational Programmes, research and consultancy services, its Bookstore operation and other professional activities in the wider ODL community. These programmes and activities comprise individual courses (such as the ICDL - the International Computer Driver’s Licence) or publication series (such as NAMCOL's Exam Preparation Guides). Each course or activity at Level 3 is made up of modules, subjects or specific projects. Finally, at the lowest level of the hierarchy are the various elements and components, including study guides, audio cassette tapes, radio broadcasts, interactive computer programs, etc. The cost objects at Level 5 are so numerous that not all of them can be shown in this diagram.

Activity

Exercise 5.2 Hierarchical Taxonomy of Cost Objects This exercise should ideally be carried out with other managers or staff in your institution. Prepare a number of blank sheets of A5 paper by cutting normal photocopying paper in half. Brainstorm all the Cost Objects you can think of for your institution. Remember that cost objects are the reasons for carrying out activities and may include products, services and/or customers. The list of Cost Drivers you prepared for Exercise 1.5 might prove useful to stimulate thinking and discussion. Write down each cost object on a separate A5 sheet. Once the brainstorm has run out of steam, you should begin to arrange the cost objects into a hierarchy similar to that in Figure 5a. You can stick the pieces of paper to a blank wall with tape or blutack, or lay them out on a large table. Remember that the most detailed cost objects (elements/components) should be placed to the right or towards the bottom. As you move to the left or towards the top, the cost objects should become more general. You may need to write new headings on additional A5 sheets to fill in the gaps. Once you have arranged the cost objects into a pyramid (with its peak either on top or to the left) and ranked them according to different levels of detail, copy it onto a separate A4 sheet of paper or have someone convert it into electronic format for future use.