Question

Benson Academy is a profit-oriented education business. Benson provides remedial training for high school students who have fallen behind in their classroom studies. It charges its students $620 per course. During the previous year, Benson provided instruction for 1,000 students. The income statement for the company follows: Revenue Cost of instructors Overhead costs Net income $ 620,000 (341,000) (207,500) $ 71,500 The company president, Andria Rossi, indicated in a discussion with the accountant, Sam Trent, that she was extremely pleased with the growth in the area of computer-assisted instruction. She observed that this department served 300 students using only three part- time instructors. In contrast, the classroom-based instructional department required 28 instructors to teach 700 students. Ms. Rossi noted that the per-student cost of instruction was dramatically lower for the computer-assisted department. She based her conclusion on the following information: Benson pays its part-time instructors an average of $11,000 per year. The total cost of instruction and the cost per student are computed as follows: Computer-Assisted 3 Type of Instruction Number of instructors (a) Number of students (b) Total cost (c = ax $11,000) Cost per student (c + b) 300 $33,000 $ 110 classroom 28 700 $308,000 $ 440 Assuming that overhead costs were distributed equally across the student population, Ms. Rossi concluded that the cost of instructors was the critical variable in the company's capacity to generate profits. Based on her analysis, her strategic plan called for heavily increased use of computer-assisted instruction.

Answer 1

a. Activity Based Costing

	Computer assisted	Classroom
Instructor cost	$                33,000	$                308,000
Overhead Cost
Directly Attributable	$              132,000
Residual	$                22,650	$                  52,850
Total Cost	$              187,650	$                360,850
Number of students	300	700
Cost per student	$                625.50	$                  515.50

Cost for overhead distribution for number of students

	Computer assisted	Classroom
Instructor cost	$                33,000	$                308,000
Overhead Cost	$                62,250	$                145,250
Total Cost	$                95,250	$                453,250
Number of students	300	700
Cost per student	$                317.50	$                  647.50