A Jordanian University Library maintains a small book donations department in the basement section of the library. The process for accepting the typical donated book includes searching the current holdings to determine if the book is already held by the library, placing a small inventory tracking device (an identification [RFID] tag) in the book, assigning the book a card catalog number, and finally entering the book into the library’s online computer database/card catalog system. The process of accepting a collection of periodicals involves a similar process. When the current holdings search reveals that the library already holds the donated item, and when there is no need for duplicate copies, the items are set aside in a small storage area and offered for sale twice a year during end-of-semester book sales. Books that are not sold during the book sale are donated to charity. In the previous year, the library raised JOD 1,000 from the biannual book sales. In recent years, the library’s donations department has been quite active. Randa Hassan, the librarian responsible for the donations department, has become exceedingly effective at soliciting donations from alumni, retiring academics, eccentric collectors, and estates all over the country. Many of the items are in print texts that the library would otherwise have had to purchase at full price. However, some of the donated books are extremely rare or out of print and would be quite expensive if purchased by the library. Moreover, the university library has acquired a unique academic reputation due to some of the rare holdings acquired through the donations department’s efforts. Both academics and graduate students from other universities make use of the University’s peculiar library resources. Perhaps more importantly, the number of students seeking specialized graduate studies at the University (especially in the areas of literature and mathematics) has increased significantly. There is some evidence to suggest that this is due, at least in part, to the increased visibility of the university, along with the research potential afforded by the unique resources accumulating at the university’s library (due almost entirely to the success of the donations department’s activities). The University Library donations department is operated by the head librarian, Randa Hassan, and a graduate assistant, Khaled Bader, a business student at the University. The head librarian is a salaried position (JOD 48,000 per year), and since Randa Hassan currently spends approximately one-quarter of her time soliciting and processing book donations, one-fourth of her contracted annual base salary JOD 12,000 is allocated to the book donations department. The University Library is also allotted JOD 5,200 per academic year in additional funds to support the library donations function. This sum is used to provide a graduate work-study student a stipend to assist Randa in the donations department during the fall and spring semesters. Work-study students typically work 20 hours per week and are paid on an hourly basis at a rate of JOD 10 per hour. A typical semester is 13 weeks long (i.e. 13 weeks @ 20 hours per week equals 260 hours per semester at JOD 10 per hour equates to JOD 2,600 each semester for a total of JOD 5,200 per year). Currently, Khaled is working all his allotted hours in the book donations department. If he were not fully utilized by the book donations department, he would work elsewhere in the university, as his work hours and stipend are guaranteed as a part of his financial aid program. In addition, the library has allotted a small space in the basement of its main building for donations activities. The library allocates a portion of the library’s general facilities costs (JOD 1,200 per year). General facility costs include depreciation on the building, property taxes, insurance, general maintenance costs, and utilities. Since the library’s catalog system is computerized, the only other applicable cost is for the RFID inventory tags, which are relatively minimal and run about JOD 0.50 per book; these RFID tags are purchased by the library as needed. Typically, Randa and her assistant solicit and process an average of 1,000 books per academic year and can, without too much difficulty, solicit and process up to 1,200 books per academic year. However, each year for the past five years, the number of books donated and processed for the library has increased noticeably. Unfortunately, Randa, as head librarian, has library duties other than donations and cannot devote any additional time to the donations department. Khaled’s current work-study contract is restricted to only 20 hours per week and only applies to the fall and spring semester. Randa has no additional help during the summer months, which creates quite a backlog of unprocessed books going into the fall semester. Of late, Randa and Khaled have begun to experience difficulty processing the increasing number of book donations, and some recent acquisitions are still sitting in boxes on the floor of the donations department’s basement space. Consequently, the library has approached the university budget committee with a request to increase the funds allotted to the book donations department by JOD 5,000 per year. These additional funds would be used to employ part-time students to work an additional ten hours per week during the fall and spring semester, and to work 20 hours per week during the summer months to compensate for the increasing number of donated books (i.e. Ten hours per week x 13 weeks = 130 hours; per semester for the fall and spring semesters; 20 hours per week for 12 weeks in the summer = 240; hours; total additional hours are 130 + 130 + 240 = 500 hours times JOD 10 per hour for a total of JOD 5,000). This would increase the department’s annual capacity to approximately 1,900 books. Asenath can handle the workload between semesters and during the holiday breaks herself with no additional help. 

Using the cost information provided by the library, the budget committee computed a unit cost per book of JOD 18.90, calculated as follows:

Librarian salary allocation JOD 12,000

Graduate assistant stipend JOD 5,200

Facility cost allocation JOD 1,200

Total costs JOD 18,400

Per book (based on 1,000 books) JOD 18.40

RFID tag per book JOD 0.50

Total unit cost JOD 18.90

The committee has since denied the request for additional funds and expressed the following sentiments. ‘‘First, the unit cost of JOD 18.90 per donated book is already too high; an additional JOD 5,000 per year would bring the cost per book to JOD 23.90 per book, an entirely unacceptable cost for the processing of an old used book:

Librarian salary allocation JOD 12,000

Graduate assistant stipend JOD 5,200

Facility cost allocation JOD 1,200

Part-time student help JOD 5,000

Total costs JOD 23,400

Per book (based on 1,000 books) JOD 23.40

RFID tag per book JOD 0.50

Total unit cost JOD 23.90

‘‘Second, at the already-high cost of JOD 18.90 per book, the library can hardly afford to accept more than 1,000 books per year; if, for instance, the library were to accept 2,000 books, it would cost the university JOD 37,800. Finally, we have serious doubts as to the value of the donations department; if it were eliminated entirely, the university could save, at the very least JOD 23,900 per year. These savings could be used to support the library’’:

Librarian salary allocation JOD 12,000

Graduate assistant stipend JOD 5,200

Facility cost allocation JOD 1,200

Part-time student help JOD 5,000

RFID tags (JOD 0.50 x 1,000 books) JOD 500

Total savings JOD 23,900

1. Explain what is meant by an activity measure. Identify an appropriate activity measure for analyzing the cost structure of the book donations department within the university’s library. Justify your answer. Is the activity measure you identified a true cost driver? Explain.

2. Cost Analysis:

a) Identify each cost associated with the library’s book donations department.

b) Classify each cost associated with the library’s book donations department as fixed or variable within the relevant range of activity you identified above. Justify your classifications. Would your classifications change if the book donations department’s activity moved outside the relevant range of activity you identified above? Explain.

c) Classify each cost associated with the library’s book donations department as direct or indirect, assuming that the cost object of interest is the book donations department as a whole. Justify your classifications. Would your classifications change if you were to assume that the cost object of interest were an individual book processed? Explain.

d) Classify each cost associated with the library’s book donations department as committed or flexible. Justify your classifications. Would your classification of the graduate student’s stipend change if you were told that the stipend was guaranteed only for the current academic year? Explain. Would your classification of the RFID tag cost change if you were told that the library is contracted to purchase the inventory tags in lots of a hundred tags at a time? Explain.

e) Explain how the analysis of cost behavior, cost traceability, and cost flexibility is relevant to the analysis of the book donations department’s request for additional funds.

3. Explain what is meant by a unit cost. Is the initial unit cost used by the budget committee computationally appropriate? Explain. Does the inclusion of fixed costs as a component of the unit costs make it problematic for managerial analysis purposes? Explain.

4. Examine and discuss the use of cost data in each of the three statements made by the budget committee justifying their decision to deny the request for additional funds. In your discussion, address the following for each statement: Are their cost computations correct? What assumptions did they make? What errors in logic did they make? Prepare a revised cost computation.

Answer rating: 100% (QA)

Answer 1 An activity measure refers to a specific base that accumulates costs within an ABC costing ... View the full answer