How Activity Based Costing Analysis Can Be Used To Test-Drive Future Scenarios

University in Austin, Texas, seen across the water

This is a companion piece to our earlier article Activity Based Costing: What’s the Return On It?

You can also hear more from William Massy at the upcoming conference “Academic Resourcing Models for Evidence-Based Decision-Making.”

Photo: Bill Massy, Former CFO, Stanford Universityby William F. Massy, Professor Emeritus and former Vice President for Business and Finance, Stanford University

Activity-Based Costing for individual courses (“Course-based ABC”) is emerging as the best way to understand the cost and revenue structures of colleges and universities. In this article, I want to extend this idea to cover prediction as well as understanding—specifically, how the model can be used to evaluate future scenarios.

Examples of Scenario Planning that Can Benefit from Course-Based ABC

Universities regularly encounter challenges that this kind of scenario planning can help address. Here are just a few, derived from my own experience over the years:

  • Respond to externally driven declines in student enrollment—for example, due to government immigration policies or new competitors.
  • Evaluate proposals for adding new programs or expanding, contracting, or eliminating old ones. Moreover, there is a good case for including capacity and margin analysis as a routine part of Program Review.
  • Cope with significant funding cuts, e.g. in government appropriations or endowment returns, especially when an institution already has squeezed out all “fat” from its budgets.
  • Revamp tuition and financial aid policies to respond to market shifts or boost the enrollment of disadvantaged students, with attendant changes in university spending.

What links these seemingly disparate situations? All of them require adjustments that may significantly affect core university activities. The changes may include adding or subtracting faculty lines, trimming or expanding the roster of course offerings, changing policies for target section size and use of adjunct faculty, redesigning certain courses into on-line or hybrid modes of teaching, or even, in some cases, closing down a department or whole campus.

Conventional practice is to test alternative responses using a financial spreadsheet model, but this glosses over the essential facts of teaching production. If we use a Course-Based ABC model instead, it is straightforward to include these facts into the planning process and predict the likely outcomes of various scenarios more accurately.

What Makes the Course-Based ABC Model More Predictive?

The answer lies in the kinds of variables and relationships Course-based ABC includes and the levels of granularity it can handle. Models that lack the structural elements built into course-based ABC aren’t rich enough to mesh with the kinds of narratives that arise in scenario planning.

Suppose one wants to consider expanding the enrollment of a given program, perhaps in response to market research about the numbers of new students in various market segments who could be attracted. A good course-based ABC model will use the curricular profiles of the target student segments to estimate the incremental costs to be incurred by departments offering the needed courses and the margins that can be expected. This is possible because the model differentiates among majors and student types, then uses the university’s policies and business rules to predict the number of new sections that will be required in each affected department, the staffing changes likely to be required, and any other costs that will be incurred. Deducting these costs from the expected revenues produces estimates of margin by course, department, degree program, and student segment.

Conventional forecasting models that extrapolate per-student costs and revenues can’t predict these outcomes with any degree of accuracy. Universities that have achieved a degree of expertise in the use of course-based ABC attest that the models can do this job. There is no substitute for making these “what-if” predictions. Without them, decision-makers fly blind with respect to the operational and financial consequences to be expected from particular courses of action.


Course-based ABC consists of five structural elements that allow for this kind of prediction:

Activities Tasks performed by faculty and others to produce teaching and learning. Both scheduled work (such as classes and online discussions) and unscheduled work (such as preparation, grading, and out-of-class contact with students).
Resources The people who perform the tasks and the facilities, equipment, and supplies needed to do so. Regular and adjunct faculty, staff support personnel, lecture rooms and laboratories, specialized equipment, course materials.
Drivers Matriculated students and other learners who benefit from the tasks, thus “driving” the resulting costs and revenue. This is usually measured in credit hours or credit hour equivalent, often for segments within the student population.
Production model Business rules, policies, behavior patterns, and definitional identities that quantify the relationships among activities, resources, and drivers. The production model deals with physical entities and relationships, thus avoiding the common problem of confounding productivity and price change effects.
Financial model Unit costs or prices for the resources; unit revenues (less financial aid) from students, and the allocation of fixed and variable overheads. For example: Faculty salaries, net tuition rates, and indirect costing procedures.

ABC models that don’t use course-level data provide detail for only elements 3 and 5. (These top-down models allocate total teaching costs in proportion to the driver data and then burden these so-called direct costs with overheads.) Omitting the structural elements dealing with activities, resources, and production prevents the model’s use in scenario planning.

How ABC is a Game Changer for Planners and Strategists

Most of the information required for constructing a course-based ABC model exists already within a university’s student registration, timetabling, general ledger, human resource, and facilities databases. Straightforward analyses of business rules, policies, and operating practices can fill in the remaining blanks. It has only been in the last few years that new software and advances in university data systems have made this kind of modeling possible. Now the models can be implemented and afforded by all kinds of institutions. Numerous universities in Australia use them, and the University of California-Riverside, New York Institute of Technology, and Johnson Community College have been early adopters in the United States.

To understand how game-changing this model is, consider what it means to “test drive” a scenario. In the planning context, scenarios sketch possible future environments that planners wish to examine, together with strategies the university might use for operating in them.

For example:

Marketplace opportunities or threats, perhaps as identified by market research Expanding, creating, cutting, or closing courses, programs, or even whole campuses
Technological changes Adjusting class sizes, faculty numbers, teaching loads, and use of adjuncts
Increases or decreases in the unit costs of resources or competitive tuition rates Course redesign
Shifts in government funding or general economic conditions Boosting tuition and/or adjusting financial aid

The items may be used singly or in combination to build up simple or complex narratives of plausible alternative futures. Constructing and analyzing these narratives allows univesity administrators to think through the possibilities they are likely to face – and the probable consequences of different strategies for facing them – in systematic and disciplined ways.

Using the Course-Based ABC model, we can test drive these alternate strategies by quantifying each strategy’s operational and financial consequences (and, to some extent, the implications for the quality of education). That is the promise of the predictive capacity of the Course-Based ABC model.

Learn More from William Massy

Join William Massy and your peers at our one-of-a kind workshop Academic Resourcing Models for Evidence-Based Decision-Making.”

Academic Resourcing Models (AR Models), which combine Activity-Based Costing (ABC) and Activity-Based Budgeting (ABB) analysis, are decision-support tools for academic resource management and related financial decisions. During this one-and-a-half-day event, you will take an in-depth look at how the model improves decisions on program size, teaching methods, faculty workload, space utilization, staffing, and enrollment decisions down to the course level.

You can also read more about Course-Based ABC in William F. Massy’s Reengineering the University: How to Be Mission Centered, Market Smart, and Margin Conscious (Baltimore, the Johns Hopkins University Press, 2016), Chapter 4.