Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 19

Cost Data for Managerial Purposes

State University Business School (SUBS) offers several degrees, including Bachelor of Business Administration (BBA). The new dean believes in using cost accounting information to make decisions and is reviewing a staff-developed income statement broken down by the degree offered. The dean is considering closing down the BBA program because the analysis, which follows, shows a loss. Tuition increases are not possible. The dean has asked for your advice. If the BBA degree program is dropped, school administration costs are not expected to change, but direct costs of the program, such as operating costs, building maintenance, and classroom costs, would be saved. There will be no other changes in the operations or costs of other programs.

STATE UNIVERSITY BUSINESS SCHOOL, BBA DEGREE Degree Income Statement For the Academic Year Ending June 30
Revenue	$400,000
Costs
Advertising—BBA program	15,000
Faculty salaries	204,000
Degree operating costs (part-time staff)	26,000
Building maintenance	37,000
Classroom costs (building depreciation)	85,000
Allocated school administration costs	43,000
Total costs	$410,000
Net loss	$ (10,000 )

Required

What revenues and costs are probably differential for the decision to drop the BBA program? What will be the net effect on the SUBS contribution (profit) if the BBA program is dropped?

Step 1 of 2

While taking decision in respect of whether to discontinue a degree or not, the university needs to consider only the differential costs and differential revenues. The university should consider only those differential costs and revenues in the decision making process. These are the costs and revenues that change in response to particular course of action.

In the present case, the university is thinking of discontinuing one of its degree program called BBA because of the operating loss of the degree. In such a case, the university needs to consider only those costs that are differential. The following revenues and costs are probably differential for the decision to discontinue the BBA degree.

Revenue: Revenue would definitely be a differential revenue item because it would change in response to particular course of action. It means, if the BBA degree is discontinued, the revenue from this degree will be eliminated and the overall revenue of the university also changed.

Direct costs such as Advertising of BBA program, Faculty salaries, operating costs, building maintenance and classroom costs would definitely be differential costs because these costs will change in response to a particular course of action. These costs will be eliminated and would not exist if this degree program is discontinued.

Allocated school administration cost is not a differential cost because it is not a cost that is not incurred exclusively for this BBA program and it is just an allocation of administrative expenses of school.

It can be said that all costs except allocated school administration costs are differential costs and revenue is differential revenue that are to be considered by the university while making decision in respect of discontinuation of the BBA program.