Department Head's Manual
As of July 1997, very few colleges and universities have implemented ABC in their financial management. Essentially, application in the service industry has been less than enthusiastic. However, in Great Britain, several universities have recently introduced ABC accounting. These universities have found that the use of ABC has helped with tighter financial management and resource allocation. (Gordon and Charles, 1997-98).
Activity-based costing has been found to have two major advantages. ABC can be implemented by changing from a traditional fund accounting to an activity related accounting. Secondly, the ABC approach can be an essential public relations tool. Most higher education institutions have been asked the question: "How do faculty spend their time?" Since the largest portion of a university's budget is buying the time of people to achieve the overall mission (Plater, 1995), the ability to quantitatively report how faculty utilize their time provides outside constituents, state legislators and university administrators valuable information to answer this question. The evaluation and budgeting of many governmental services are becoming performance-based whereby public institutions need to be prepared to explain how they effectively and efficiently deliver their services and fulfill their missions (Senate Report, No. 1785, 1992). Activity-based costing approach provides a reliable method to report and capture the time spent by faculty within specified activities contributing to the overall performance of the university.
For most public universities, the State allocates dollars to the instructional programs. However, we know that these dollars support instruction, research, public service and administration. In FY 1997 K-State adapted the activity-based costing approach from one that was traditionally used for budgeting and managing productivity to an approach that was more programmatic in nature and provided a better way to handle how funds are expended in terms of mission driven issues.
At the university level, the Provost did not have the information needed to explain why two departments in the same college with similar missions had drastically different outputs (extramural funding support). If the University could define the "time and talent" of its faculty (inputs) and the "costs" associated with each of the defined activities, it would be in a better position to answer the questions raised by its Provost, state legislators and other outside constituents.
In the early 1980's, the State of Kansas Legislature requested that each institution provide information regarding faculty workloads using a diary approach. Essentially, faculty would keep track of what they did for one week out of the year. For faculty, this approach was time and cost intensive and it was very subjective, biased, and difficult to analyze. The University of Massachusetts at Amherst used a similar approach in their Post Audit Review to the State Senate Committee in 1992. They, too, realized that the reliability and usefulness of this type of reporting is questionable since the faculty members reported their activities retrospectively. Realizing the need to understand what faculty members are doing and to have a process that is on-going (annually), a new approach was necessary.
K-State reviewed several approaches and identified that the activity-based costing approach had the potential to be effectively used in higher education. The School of Dentistry at Indiana University provided valuable information supporting the use of ABC in higher education. From the School of Dentistry's experience and analysis of the process, two items surfaced as important factors for the success of ABC: (1) the organization of cost data is by inputs not outputs, and (2) time is a major resource and its use should be measured (Gilmore and DeHayes, 1996).
For the activity-based costing approach to be feasible, major activities and associated costs had to be identified. With faculty time considered the most important fungible resource (Plater, 1995), identifying the activity associated with the faculty member's time was the initial step. K-State also recognized that the talents of their faculty are its greatest and most important resource. Consequently, when faculty talents are utilized appropriately, every aspect of the university gains. Of course, for a college/university, activities are less visible since the activities are related to the faculty member, not to a process. To many, capturing this type of information might appear impossible. With this in mind K-State merged two constructs that were already in place: the faculty evaluation/goal setting procedures and the budget process. By coordinating the reporting of faculty time with the evaluation process, the information reported was current and acceptable. More importantly, the time and costs associated with each activity could be adjusted from one year to the next depending upon the goals of the faculty member, as well as the mission of the department.
Clearly, the department's goals and mission dictate the allotment of the faculty's time. The university provides three main functions: instruction (teaching), research, and public service. With the addition of the administrative activity, four major activities were defined. Within each of these activities, sub-activities were defined and provided departments and faculty more diversity in their allocation of time. One such example is a faculty member whose primary activity is research. However, their research extends to advising graduate students about their thesis and dissertation research. Therefore, this faculty member would allocate some time to instruction (advising) even though the activity is supported totally with research funds.
After several preliminary drafts, the instruction activity was divided into four specific areas: (1) undergraduate instruction, (2) undergraduate advising, (3) graduate instruction, and (4) graduate advising. The research activity was broken out into two distinct areas: (1) research funded from outside sources and (2) research directly related to the department/unit (department-funded research). Within the public service activity, four activity areas were defined: (1) non-credit programs for public use and externally funded programs, (2) activities associated with shared governance, (3) professional service, and (4) professional development (e.g., sabbatical). The final broad activity area of administration was a combination of academic support, academic administration, student services, and general administration (including facilities). Overall, fourteen activities were used to describe a faculty and staff member's time.
The process to collect the activity data was directly related to the faculty evaluation cycle. During the annual goal-setting period, the faculty member (or staff member) and the department head discussed the activity assignment for the next academic or fiscal year. The faculty member's time was allotted using the 14 activities and in accordance to the mission of the department/unit. This approach attempts to individualize the allocation of effort according to the strengths of each faculty member while fulfilling the goals and missions of the unit or department. This concept was seen as advantageous in providing clarification of the basis upon which the faculty member was evaluated.
Once the evaluation process was complete and the state legislature reached an agreement on allocation of state funds to the state universities, allocation letters were distributed to the departments and units. Departments used faculty and staff assignments to allocate funds within the activities identified (instruction, research, public service, and administration). The department head and in some cases the dean's office worked together to allocate these funds. Funding for support staff, student workers, and operating expenses (not directly assigned) were allocated based upon the overall percentage of each activity for the department/unit. Once the funds were balanced with the overall allocation of funds, the funding dollars and percent of time (activity) by faculty and staff were entered into a database.
Gillmore, H.W., & DeHayes, D.W. (1996, March). Applying activity-based costing in a School of Dentistry. Paper presented at Kansas State University, Manhattan, KS.
Gordon, G., & Charles, M. (1998). Unraveling higher education costs. Planning for Higher Education, 26, 24-26.
Plater, W.M. (1995). Future work: Faculty time in the 21st century. Change, 27, 22-33.
A review of faculty workload policies and faculty workloads at the University of Massachusetts at Amherst. Senate Report No. 1785. The Commonwealth of Massachusetts, Report of the Senate Committee on Post Audit and Oversight. Amherst, MA: Author. (1992).