Understanding True Labor Costs in Higher Ed: Why Activity-Based Costing Matters More Than You Think

In today's quickly changing higher ed landscape, understanding the true cost of your administrative functions is a necessity to keep costs in check. Traditional accounting can often obscure the true cost of managing administrative functions, delivering academic programs, and supporting students especially for institutions with decentralized operations and intricate overhead structures. That's where activity based costing comes in and can serve as a critical lens to meet the moment and navigate the complex financial landscape ahead.

What is activity based costing?

Activity based costing goes beyond traditional allocations and increases transparency into hidden costs in any organization. It dives into how each employee spends their time, identifying and assigning costs to specific activities, regardless of department or job title. Think of it as a detailed map of your cost landscape, revealing the hidden pathways and unexpected turns.

Instead of relying on broad allocations, activity based costing breaks down costs into manageable "activities." An activity-based approach is not limited by organizational structures or charts of accounts. It looks at the true cost to deliver an activity (e.g., General Accounting services) based on who does the work, not where they sit in the organization. This analysis helps identify what work is done centrally, decentralized in academic units, through shared services, or via external labor.

Activity based costing in action at colleges and universities

Here’s an example of how labor spend might look through a centralized general accounting lens vs. an activity based lens:

• If you are only looking at a centralized general accounting function, you can see the number of people in the function, and therefore spend, within that department.

• However, an activity-based analysis might illustrate that 80% of the spend is decentralized and happening outside of the general accounting function, with only 20% in the central Finance & Administration department.

• If 80% of the work is completed outside central F&A, for instance, this prompts a strategic question: why would academic units employ 4x the number of staff accountants than central accounting?

Use Case: Understanding hidden finance activity costs

This visual highlights the power of the activity based view and is also based on real data. It really highlights how the departmental budget view that is typically available to higher ed leaders differs from an activity based view and allows insight into hidden costs. 

If you are strictly looking at a departmental view, you can see you have 100 central finance employees. But once mapped into our activity model, it comes to light that they have an extra 140 decentralized employees doing finance activities, which amounts to $4.1 million in hidden labor costs (and ERP budget reports do not account for this) which is actually almost 50% more!

This kind of granular insight isn’t about judgment; it’s about clarity. This data reveals opportunities for strategic alignment and efficiency.

What do you need to take an activity based approach at your institution?

Any activity based cost analysis will require a data model to standardize and map activities at your institution. At HelioCampus, our clients benefit from our established, but flexible, Standard Activity Model (SAM) to map all labor costs to various administrative, academic, and athletic activities. This provides a unique view into finances not available with traditional ERP and budgeting tools. Leveraging the SAM has the added benefit of enabling institutions to benchmark the cost to deliver activities against peers, as it acts as a common model to visualize the cost structure.

Activity based costing provides a transparent and accurate view of how resources are consumed, enabling institutions to demonstrate the value of their programs and services to stakeholders. In a world demanding greater accountability, activity based costing helps institutions meet reporting requirements and demonstrate responsible stewardship of resources.

Embrace the power of activity based costing

The new budget bill includes new accountability measures and limits on student and parent borrowing. This further underscores the need for many institutions to deeply analyze their costs, starting with labor spend (60-70% of an operating budget). These measures will have direct and second-order effects that will impact financial operations for years to come.

Activity-based costing is not new or novel. It is not a silver bullet. It is a vital tool, augmenting the data institutions already have from their existing systems and departments. By embracing activity based costing, you can gain a deeper understanding of your cost structure, make more strategic decisions, and drive sustainable growth.