Overhead allocation model for universities - a case for Strathmore University in Kenya
Ndoloka, Vincent Mutei
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An organization’s costing and overhead apportionment system is a system that helps the management with the strategy planning and the system also plays an important role in providing accurate cost information about the products and customers (Elias & Mehrotra, 2018). The pricing of a service or product should consider both the direct and indirect costs incurred. The allocation of indirect costs can be a complex process and if it is properly done, it will ensure fair costing and pricing of products and services while at the same time helping organizations’ management identify areas of inefficiency in order to take corrective action. According to El-Gammal et al (2016), most of the service sector organizations including education institutions are still using the traditional accounting system which allocates the company’s overhead costs to the performed services based on a single cost driver. This paper examined the current overhead allocation model used by Strathmore University and provides for an improvement to the current model using Activity-Based Costing. The reason for the study anchoring on Activity based costing is the study by Elias & Mehrotra, (2018), who noted that the upsurge of researchers’ and practitioners’ attentions towards the implementation of Activity-based costing in organizations were as a result of Activity-based costing’s superiority over traditional costing methods and subsequently its significance in enhancing organizational performance. The specific objectives were to determine challenges with the current overhead absorption model that Strathmore University uses, to identify and explore appropriate data in Strathmore University that may be used for overhead allocation and to develop a data driven overhead allocation model for Strathmore University. The study adopted a one case study methodology. The study found that management of Strathmore University were not happy with its current overhead allocation model. The study also manage found appropriate data in Strathmore University that could use for overhead allocation. An overhead allocation model was developed for library and admissions departments of Strathmore University based on the Activity-based model. The study concluded that the current overhead allocation model developed by Strathmore was overcharging some departments and undercharging others. This study was limited to Strathmore University and in particular its library and admissions departments. Activity-based Costing model was an overall improvement over the existing overhead allocation model. The model developed was on a departmental level. However, as proposed by Naidoo (2011), there is need for further analysis and tracing of activities to the course/product level.