# A Jordanian University Library maintains a small book

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.

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