I'm sorry, but I'm having a very difficult time using the information on this cost report," said Mr. Adam King, Principal of Jefferson High School. "I mean, salary totals and the average unit cost may be useful to you and the people in the Central Office, but I need to know more detail. We have so many different types of activities at Jefferson that I need to know the unit cost for each if I'm going to do anything about cost control."
Mr. King was discussing the Los Diablos School System's cost accounting system with Mr. Michael Abbott, Director of the Fiscal Affairs Department. Mr. King had requested the meeting because he felt he needed more information than that contained on his school's cost report, contained in Exhibit 1. Interested in improving cost control methods at Jefferson High, Mr. King argued that the average per-student cost calculation was not an accurate measure of Jefferson's costs because the type and content of a student's educational activities varied greatly depending on the student's grade, interests, and special needs. According to Mr. King, the School System's cost accounting system needed to be revised in order to identify the specific unit costs of various student-based activities. During the discussion, Mr. Abbott became interested in Mr. King's approach, and agreed to help him design a cost accounting system that made these distinctions.
Last year, in conjunction with the Los Diablos School System's move toward decentralizing its educational activities, a school-based cost accounting system had been developed. As one of the system's largest schools, Jefferson was among the first to implement such a system, which required principals to monitor their expenditures. By involving principals in the budgeting and expenditure review process, Ms. Nell Chamberlain, Los Diablos' School Superintendent, hoped to gain more control over school-based costs and to improve the system's overall financial performance.
The School-Based Cost Accounting System (SBCAS) was based on a standard costing unit which each school could use to measure its overall costs. SBCAS used a student as this basic cost calculation unit. To calculate an average cost per student for any given school, SBCAS first collected the direct costs on the School-Based Cost Report (SBCR), as shown in Exhibit 1. The Fiscal Affairs Department then allocated the Central Office costs, such as depreciation, health and life insurance, and administration to each school according to a predetermined method. These allocation methods for indirect costs had been determined by Mr. Abbott, and included classroom space, number of student-days, number of employees, and salary dollars. The basis of allocation for any given cost was designed to provide the fairest means possible for distributing it to the various schools in the system. . . .
- What is the cost for each of the three students Mr. King chose at random? What explains the differences?
- Which of the three systems is the best? Why?
- What other systems, if any, would you propose?
- What should Mr. King do?