Question

Apple Academy is a profit-oriented education business. Apple provides remedial training for high school students who have fallen behind in their classroom studies. It charges its students $750 per course. During the previous year, Apple provided instruction for 1,000 students. The income statement for the company follows:   

Revenue	$	750,000
Cost of instructors		(340,000	)
Overhead costs		(230,000	)
Net income	$	180,000

   
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 200 students using only two part-time instructors. In contrast, the classroom-based instructional department required 32 instructors to teach 800 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:

Apple pays its part-time instructors an average of $10,000 per year. The total cost of instruction and the cost per student are computed as follows:

  

Type of Instruction	Computer-Assisted				Classroom
Number of instructors (a)		2				32
Number of students (b)		200				800
Total cost (c = a × $10,000)	$	20,000			$	320,000
Cost per student (c ÷ b)	$	100			$	400

   
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.

Mr. Trent was not so sure that computer-assisted instruction should be stressed. After attending a seminar on activity-based costing (ABC), he believed that the allocation of overhead cost could be more closely traced to the different types of learning activities. To facilitate an activity-based analysis, he developed the following information about the costs associated with computer-assisted versus classroom instructional activities. He identified $160,000 of overhead costs that were directly traceable to computer-assisted activities, including the costs of computer hardware, software, and technical assistance. He believed the remaining $70,000 of overhead costs should be allocated to the two instructional activities based on the number of students enrolled in each program.

   
Required

Based on the preceding information, determine the total cost and the cost per student to provide courses through computer-assisted instruction versus classroom instruction.

Answer 1

Solution

Apple Academy

Costs                           Computer – Assisted Classroom       total

Cost of instructors      $20,000                       $320,000         $340,000

Computer costs           $160,000                     0                      $160,000

Other overheads         $14,000                       $56,000           $70,000

Total costs                  $194,000                     $376,000         $570,000

Number of students    200                              800                  1,000

Cost per student          $970                            $470

Notes/Workings:

1. Cost of instructors is $10,000 per instructor, so cost of instructors for computer-assisted instruction = 2 instructors x 10,000 = $20,000 and cost of instructors for classroom instruction = 32 instructors x $10,000 = $320,000.
2. Of the total overheads $230,000, the portion of $160,000 is directly traceable to computer-assisted activities, including the costs of computer hardware, software and technical assistance.
3. The remaining overhead of $70,000 is allocated to the two instruction modes on the basis of the number of students as follows,

Total overhead = $70,000

Total number of students = 1,000

Overhead per student = $70,000/1,000 = $70

Overhead allocated to computer-assisted instruction = number of students x overhead cost per student

= 200 x $70 = $14,000

Overhead allocated to classroom instruction = number of students x overhead cost per student

= 800 x $70 = $56,000

1. Total cost per student is determined as follows,

Total cost/number of students

For computer-assisted instruction, cost per student = $194,000/200 = $970

For classroom instruction, cost per student = $376,000/800 = $470

Hence, allocation of overhead costs on the activity-based model demonstrates that the cost per student is higher for computer-assisted instruction compared to the classroom instruction.