University Cost Management by Integrating Activity Based Costing and System Dynamics Approach

In order to fulfill their mission in lack of resources and increasing needs, university management should improve their decisions not only by considering optimization of performance indicators, but also by considering the effect of their decisions on cost of services. This requires using tools such as activity-based costing to provide accurate information about the cost of services. However, in this approach, the dynamic relationships and the variability of cost and activities over time are not considered. Dynamic modeling provide an efficient tool for studying and testing the impact of possible changes on real systems in a virtual environment. Therefore, the aim of this study is to gain a better understanding of dynamic behavior of cost over time and under different conditions using dynamic modeling.

Due to the multiplicity of activities, cost and cost drivers in universities, and due to the dynamics of cost drivers over time and the complexity of depicting the relationships between multiple costs and activities in  university as a dynamic system, in this research, the system dynamics approach has been used for modeling activity based costing. This research is a case study based on financial and operational data of Al-Zahra University. The main services and activities of the university are determined based on the classification of the university's programs and activities in Table (1) of Appendix (4) of the annual budget rules. Observing, interviewing, and reviewing the structure of the university's activities were used to identify activity drivers, cost drivers, support activities, and relationships between costs and activities.

One of the initial findings is the cost of the main services, which the validation results show the high accuracy of the model (mean difference of 0/03 percent). Then, the cost of the main services was examined under the two scenarios of reducing the number of undergraduate students and increasing the number of professors, in order to achieve the desired ratio of students to professors and strengthen the population of Master and PhD students. Comparing the results enable management make better decisions based on available resources. Findings also show that this model also eliminates the complexity and cost of updating activity-based costing system and also provide the possibility of timely cost analysis by modeling the causal relationships between all variables and taking into account the dynamic nature of the variables. Applying this approach also makes it possible to predict the cost of services for several future periods.

Dynamic modeling of the university cost management system allows managers to examine the cost of services in a virtual environment, under different policies regarding faculty recruitment, student admission, and etc., which may have a positive effect on receiving desired goals and make decisions based on forecast of the cost of services and activities and available resources.