Journal of

Accounting
Education

J. of Acc. Ed. 22 (2004) 345355

www.elsevier.com/locate/jaccedu

Case

Compass Point University: how many

spring/summer classes should be oered?
Sue Ravenscroft

Department of Accounting, Iowa State University, 2330 Gerdin, Ames, IA 50011, USA
Received 1 May 2004; received in revised form 1 November 2004; accepted 1 November 2004

Abstract
This case poses the issue of marginal costing for a service that occurs regularly, but is not
the primary function of the organization. The setting is a university and the service is courses
oered during spring/summer semesters, a situation familiar to many students. In this case,
students must decide whether spring/summer courses are analogous to a special order or
whether such costs should be considered integral to the institutions programming. Students
are asked to identify relevant costs and revenues and to devise a decision rule which takes into
consideration the implications of various cost assumptions.
After completing the case students should be able to apply the concepts of incremental revenues and costs in decision-making. They should also be able to justify using incremental costing in a recurring setting. Students will be able to explain how managerial incentives, in the
form of xed budgets, can interfere with the application of incremental cost and revenue concepts. During class discussion, the broader implications of changing institutional responsibility
reporting and budgeting policies may be raised. This case is suitable for introductory courses
at both graduate and undergraduate levels and in the rst upper-division undergraduate
course in managerial accounting.
2004 Elsevier Ltd. All rights reserved.
Keywords: Relevant; Costing; Decision-making; Non-prot; Setting

Tel.: +1 515 294 3574; fax: +1 515 294 3525.

E-mail address: sueraven@iastate.edu.

0748-5751/$ - see front matter 2004 Elsevier Ltd. All rights reserved.
doi:10.1016/j.jaccedu.2004.11.001

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S. Ravenscroft / J. of Acc. Ed. 22 (2004) 345355

1. Introduction
Compass Point University (CPU) is a comprehensive public university that oers
many masters and professional degrees, and one doctoral degree. The university began as a teaching college and still graduates the largest number of teachers of any
school in the country. CPU is located in a small city within a large metropolitan area.
About 80% of the students are commuters, most of whom work at least part-time.
Several other colleges and universities are located within a 40-mile radius.
CPUs academic year consists of a fall semester (SeptemberDecember), a winter
semester (JanuaryApril), and two half-semesters of six weeks each, designated as
spring and summer. The spring/summer half-semesters are normally when many students take courses at CPU. Part-time students and non-traditional students often
base their programs on the assumption that they will be taking classes year-round.
Because the spring/summer courses are oered on an accelerated basis, students
course loads are, of necessity, considerably lower than during the regular academic
year. Nonetheless, spring/summer courses are extremely important because some
students use this time to take pre-requisites for courses they will be taking in the fall.
Alternatively, some students delay taking their last required course before graduation until spring or summer when they can concentrate on that single course.
Because CPU is a major training institution for teachers, the University has
historically oered many short courses during the spring/summer terms aimed specifically at teachers and timed to accommodate their work schedules. The ratio of tuition dollars received by the university in a fall or winter semester compared to dollars
received in a spring or summer half-semester is approximately seven to one.
Although the demand for spring/summer courses has slowly but consistently been
increasing, students often nd that the oerings are rather slim and many classes are
lled. Over the last several years there have been instances where the demand for
courses, as evidenced by the student sign-up sheets maintained in academic department oces, was very high, yet the department heads were not able to add additional
sections. This occurred because of the budgeting policies surrounding spring/summer
course oerings at CPU.
Academic departments operate as cost centers. Department heads, who assign faculty to courses, are held responsible for keeping departmental operating costs low.
The University pays faculty 10% of their academic year salary for teaching a
spring/summer course. Salary and the associated fringe benets are the cost that appears on a department heads budget when spring or summer courses are oered. The
amount of the budget for spring/summer teaching is allocated to colleges by the University administration. The administration has not shared with faculty its formula for
arriving at the budget amount; but the amount seems to increase slowly each year,
unless demand in a particular college is down one year, and then the funding is decreased. The tentative spring/summer course schedules are monitored rather closely
during pre-registration in an eort to keep costs low by canceling under-enrolled
classes.
Full-time CPU faculty members are paid for the academic year, which includes
fall and winter semesters. Faculty members earn extra pay when they teach in the

S. Ravenscroft / J. of Acc. Ed. 22 (2004) 345355

347

spring or summer terms, as noted above. Many CPU faculty desire spring/summer
teaching because it provides the opportunity to earn extra pay. Often while recruiting
new faculty, department heads treat spring/summer pay as an additional perquisite.
If, however, departmental faculty are unavailable for spring or summer courses, then
department heads are allowed to hire temporary (adjunct) faculty, usually for about
half the cost of regular full-time permanent faculty.
When students went to faculty in the College of Business complaining that courses
were not oered even when demand for them was quite high, the faculty considered
the decision to oer a spring/summer course an excellent area for applying the concept of marginal costing. The faculty learned that department heads were unable to
add sections even when twenty or more students had signed a waiting list because
adding a course would cause costs to overrun the budget. The faculty then went
to the administration to urge that the xed cost budgets be overridden so that additional spring/summer courses could be added on a marginal cost recovery basis. If
the marginal revenue for a course equals or is greater than marginal cost, then the
course could be taught during the spring/summer half-semesters. The administration
responded that the denition of marginal cost relied upon by the faculty was
incorrect and needed to be claried.
The non-teaching sta, which includes secretaries, grounds and maintenance
workers, and administrators, is hired on a 12-month basis and work through the
spring/summer terms whether or not classes are being oered. Because of the 12month contracts, the administration believes that marginal costs of spring/summer
should include one-third of the costs of operating and maintaining the extensive
physical plant of the university, one-third of the cost of all non-teaching sta, and
one-third of all other costs the University incurs while educating students. The
administrations reasoning is based on the fact that spring/summer semesters span
the four months of May through August, or one-third of the calendar year.

2. Required
1. Identify the overall goals and objectives CPU likely has for oering spring/summer courses.
2. (a) Identify CPUs costs and revenues related to oering courses to students.
(b) Indicate which of the costs and revenues identied in part (a) are marginal or
incremental of the spring/summer oerings; i.e. which costs and revenues are
aected when an additional course or an additional section of a course is
added during the spring/summer semester?
3. Evaluate the administrations statement that one third of the costs of maintaining
the universitys physical plant and labor costs of the non-teaching sta should be
charged to spring/summer classes. As a public university, CPU also receives a signicant appropriation from the state. Should the administration consider one
third of the states appropriation as revenue related to the spring/summer courses?
Explain why or why not.

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S. Ravenscroft / J. of Acc. Ed. 22 (2004) 345355

4. What are the likely consequences if the administration were to change its policy
entirely and say that there would be NO pre-determined spring/summer teaching
budget and that ALL spring/summer courses must be oered on a marginal cost
recovery basis? Would students be better or worse o? Why?
5. Which goals and objectives are being well served by the current system? What
problems does the current system create? Propose a policy for determining the
number of spring/summer courses and justify it in terms of incentives for the
department heads, service to students, and the Universitys budget.
(If you prefer using computations in answering the questions, please assume that
the average faculty annual remuneration is $60,000 and that the average tuition per
credit hour is $125 for undergraduate students and $175 for graduate students.)

3. Teaching notes
This case has been used in three graduate classes, an MBA short survey of managerial and nancial accounting, a full-semester MBA introductory managerial
accounting course, and a capstone course in an MSA program. It has also been used
in the standard junior-level managerial/cost accounting course, and could be used in
a principles-level course. Students found this case interesting because they have faced
limited spring/summer oerings and the scheduling problems that poses for them.
This case oers students a chance to see the same principles discussed in the nonroutine decision-making chapters applied to a service with which they are familiar.
This case is purely narrative and is easy to read, so it can be distributed in class for
groups to work on together in preparation for class discussion during the same
period. This approach has been successfully used in a once-weekly course that meets
for 2 h and 40 min. However, the case can also be used as a take-home exercise that
students turn in or come to class prepared to discuss. Students comments during the
case discussion could provide a partial basis for grading participation. If the case
were given as a written assignment, then the grading would be done, as most cases
are, on completeness and clarity of responses.
The faculty members board work during discussion is fairly straightforward. The
questions ask for lists of items or for arguments pro and con. Faculty could list all
the items generated by students or only those they consider valid. The rst approach
oers a sense of participation to students, but requires some clarication and summarizing at the end. The second approach oers students a cleaner set of notes,
but requires more screening of acceptable answers as students are generating them.
Since this case is relatively short, listing all suggestions would not consume an undue
amount of class time. The instructor could have prepared a list in advance and
distribute it to students at the end of the discussion.
The actual numbers are produced at the end of the teaching note. These numbers were taken from a report issued by a faculty budget committee at the school on
which CPU is modeled. The report provides the incremental costs and revenues of
spring/summer courses over several years. The report was, in fact, issued to inuence

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349

the scheduling of courses. An unintended consequence was that it aected negotiations between the faculty union and the administration because the administration
could no longer argue that spring/summer courses caused economic losses to the university. However, this issue is not directly relevant to the case. These numbers should
be passed out as the discussion is winding down, rather than early in the discussion,
because students should not base their reasoning on the faculty report or be distracted by how the faculty used the information they gathered.
Upon seeing the actual gures, at least one student in each class has suggested
that perhaps universities ought to consider dierential pricing, with spring/summer
courses priced lower because overall demand is lower at this time of year, and many
other schools compete by oering short courses at desirable vacation locations during the spring/summer season. The discussion of that issue, which students tend to
support enthusiastically, can lead to issues of pricing in general, dierentiated
product pricing, and to discussions about whether state-supported educational institutions are supposed to prot from students. The use of some courses to crosssubsidize other course oerings could also be discussed. Faculty can point out that
public universities usually have a mandate to educate a broad public group and do
not have the option of specializing only in protable disciplines, which private
institutions can do, so cross-subsidization is not necessarily sub-optimal.
A footnote to the actual numbers until 1994, the amount received for teaching a
spring or summer course was 11% of a faculty members regular salary. The CPU
administration claimed that spring/summer half-semesters were a loss to the university and negotiated with the faculty to reduce their pay per course to 10%. A report
prepared by a faculty budget committee demonstrated that, on a marginal basis,
spring/summer was not generating losses and that the spring/summer surplus grew
substantially when faculty pay was decreased. As a result of this report, which
was rst issued in spring of 1995 and has been updated annually since, pay for
spring/summer was not on the negotiating table when the three-year contract was
up for renewal in 1996.

4. Suggested responses and possible avenues of discussion

1. Students will probably give several reasons universities oer courses during the
spring/summer semesters, including the possibility that the university is trying to
accommodate the schedules of students who work full-time and cannot take courses
during their working year. This reason addresses the mission of a public university to
serve the students of that region or state. Another reason might be that the university
is hoping that it might attract students who take summer classes to transfer and become fully enrolled at CPU. This reason is based on marketing and is probably not a
primary motivation for CPU. Oering spring/summer courses could also allow CPU
to satisfy demand that cannot be met during the year when all space is fully utilized,
and allows the university to satisfy demand without having to make investments in
increased capacity or infrastructure. In a similar vein, students might say that since
the university resources are there and are not fully used during the summer, this

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S. Ravenscroft / J. of Acc. Ed. 22 (2004) 345355

would appear to be a low-cost alternative, or even a way to use resources without

incurring additional capacity costs. The latter reason suggests that students are
thinking about some costs being committed or sunk, and could serve as a lead-in
to the second question.
2. (a) General costs of educating students include faculty salaries, support sta
salaries, administrative salaries, repair and maintenance, insurance, legal fees, utilities and power, grounds-keeping, depreciation, computers, supplies, furniture, oce
supplies, and others. Students may instead list the same costs by function, saying, for
instance, the costs of providing instruction, counseling to students, housing, library,
university administration, and upkeep. Students may mention the cost of publicity
and preparing catalogues and course schedules, maintaining university web sites,
and alumni relations.
Revenues come from tuition and other fees charged to students, from state appropriations, Federal grants, donations, general purpose grants, housing fees, research
grants, user fees for some programs (e.g. sports training camps), and prot sharing
with bookstores or other lessees of university space. While universities may have
other sources of revenues, these are the primary ones for public universities.
(b) When this question is re-framed to ask students to focus only on marginal revenues and marginal costs, the faculty member can ask students to identify those costs
and revenues that change when a single section is added. Students may be a little
puzzled by this question at rst, so they may need to be reminded to think of the
most obvious incremental costs and revenues, because in this case, the most obvious
are also the most signicant revenues are tuition and fees, while costs are faculty
salary and benets.
Although marginal revenues consist primarily of tuition, some institutions may
charge a course fee, a registration fee, or other special fees. All of these represent revenues to the university that would not have existed had students not enrolled in the
spring or summer course.
Marginal costs consist primarily of faculty members salary and benets. Fringe
benets are signicant and students may be surprised to learn that they are over
20% of salary costs. The case notes that clerical, maintenance, and housekeeping sta
are all hired on a 12-month basis, so there are few marginal costs in these areas. The
costs of supporting the registration process and the paperwork involved will probably be noted by students. I nd that when I ask students how substantial such costs
would be, students usually tend to estimate them as being rather low. If part-time or
temporary sta are hired to help with registration, those costs should be included.
Students might suggest that a portion of printing costs for having a separate spring
and summer schedule should be included and allocated to each course oered during
the two half-semesters. Such costs are likely to be trivial, however; once the decision
is made to hold any classes during spring or summer semesters, a schedule has to be
prepared for each semester and the printing costs vary more with the number printed
than with the number of courses oered. Utilities could also be included, but some
students will likely note that this is a very small cost. The buildings are already being
kept air-conditioned because of the oce and administrative sta being there during
the spring and summer.

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351

3. The third question gets at the heart of dening marginal revenues and costs.
Should these revenues and costs be considered marginal if they relate to a substantial service that is oered every year and is, to some extent, part of the basic
set of oerings of the institution? This would be a good time to review the ways
that costs are distinguished for various purposes. For long-term planning, costs
are generally classied as xed or variable, and possibly some variation of xed
such as step xed; this classication serves as the basis for planning and control
and enables costvolume-prot analyses. For evaluating performance, we rely on
the distinction between costs which a manager can control or has discretion over
and costs over which a manager does not exert control. Finally, for this case, the
relevant purpose is decision-making how to decide whether or not to oer a
spring/summer course. For that type of decision the distinction is between costs
that are relevant and costs that are not. Relevant costs are also known as incremental or marginal costs; i.e. they change as ones decision changes. Costs which
are irrelevant include sunk costs; i.e. costs that have already been incurred, and
future committed costs, the level of which will not change with the decision to offer one additional spring/summer course. Allocated costs are also irrelevant because the total amount remains constant regardless of the allocation.
The faculty argued that instead of holding the department heads responsible for
meeting a xed budget for spring/summer semesters and evaluating their performance by how well they meet the xed budget, the university should allow department heads to rely instead on the relevant-irrelevant distinction and oer
additional courses when the relevant revenues exceed the relevant costs. The CPU
administration responded to the faculty suggestion by stating that the real cost of
the spring/summer half-semesters should include an allocation of one-third of the
salaries of non-teaching sta and maintenance and physical plant costs. Students
should be urged to consider arguments on both sides of the issue. Such arguments
may include the following points:
Arguments for excluding non-teaching sta and infrastructure costs could include
the following:
 Support, maintenance, cleaning, grounds, and building sta are already hired on a
12-month basis.
 If CPU were to switch to eight-month contracts with at least some of those people, they might have to pay a higher hourly rate as an inducement for people to
take permanent jobs that are, in fact, not full-time.
 The administration has not made an eort to use the university as fully during
spring/summer as it is used during fall and winter.
 Costs such as plant, maintenance, and full-time sta are committed costs incurred
because of fall and winter activities.
 At this time, CPU is not perceived by its employees or by students as a fullservice year-round institution, because both course oerings and support services are reduced during spring/summer. For instance, the library and computer center are open fewer hours, and oce sta are allowed to use extime.

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CPUs primary focus is on fall and winter semesters. If administrators argue that
one-third the costs should be allocated to spring/summer, then consistency requires
that they also allocate one-third the state appropriation (the total is approximately
$110 million) to the spring/summer semesters as well. From the students point of
view, fall and winter are the primary semesters for taking courses. The amount of
tuition revenue in fall or winter averages $24,000,000 per semester versus just over
$7,000,000 for both spring and summer combined. Thus, spring/summer tuition is
about 13% of annual tuition, which is, in turn, approximately 35% of all university
revenues ($55 million of $110 total budget).
One could argue in favor of allocating one-third of university costs to the spring
and summer semesters by noting that the universitys mission is to provide education to eligible students at an aordable rate. It does this throughout the year; the
timing of the service is less signicant than the fact that this service is the universitys primary activity. Furthermore, oering courses should not be considered as
an ancillary activity; these courses are not oered on a one-time basis. If the
spring/summer schedule were discontinued some identiable costs would be eliminated or reduced. For instance, a few buildings could be closed and sta could be
laid o each summer. Keeping buildings open incurs utility and maintenance costs.
Because it is considered an obligation of the university to oer courses during the
spring/summer, the costs of maintaining the university for that third of the year
should be allocated to the services oered during that third of the year, just as
is done for fall and winter.
Allocating one-third of the cost to the university might motivate people at the university to think of additional uses of facilities during spring/summer that would generate more revenues to oset that cost allocation. Finally, some schools may use
spring/summer course scheduling as a way to accommodate regular school year
demand that exceeds capacity. Rather than incur the costs needed to add classrooms
or other infrastructure, schools may schedule additional courses in the spring/
summer semesters.
4. Some students would be adversely aected if all spring/summer courses were
oered on a marginal cost recovery basis. Students in specialized programs or in
upper-level courses (where enrollment levels can be low) are most at risk of having
courses dropped from spring/summer schedules. Given the high percentage of
part-time students at CPU, this possible disruption imposes a real cost; some students education may extend several years because of diculties in scheduling
sequential courses. Students could choose to attend one of the other universities
and colleges within driving distance and, possibly, transfer there permanently.
CPU currently serves students who return to the metropolitan area for the summer
but attend other universities during the regular academic year. Tuition from these
visiting students, who typically impose few demands on the university (in terms of
health services, counseling, etc.), would be lost.
Department heads often treat spring/summer teaching as part of compensation
packages when recruiting faculty. Many faculty rely on the spring/summer supplement to their salaries. If spring/summer courses were discontinued, those faculty
could experience some nancial stress. This system would introduce more uncer-

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353

tainty to students and faculty because scheduling would be contingent on demand,

so courses could be added up to the rst day of classes. This would impose a heavy
burden on department heads and would signicantly reduce the predictability
inherent in the current system. Qualied faculty may not be available on such short
notice.
Students could possibly begin to game the system. They could decide to help
each other get necessary or desired courses by signing up and then withdrawing within the rst week. To avoid this possibility, the university might impose draconian
withdrawal fees, a move that would probably be perceived as hostile by the students.
Again, this is a very negative consequence from a marketing point of view.
5. Under the current system, department heads are considered managers of cost
centers, yet they, and to some extent, their faculty, are held responsible when enrollments decline. In terms of responsibility accounting, the current system sends a rather
mixed message. Department heads are responsible for keeping costs down AND for
increasing enrollments. But doing the former often entails not doing the latter. Some
obvious ways to reduce costs would be to oer fewer courses, hire more adjuncts, and
have fewer but larger classes, thus reducing service to students. For those faculty who
rely on teaching spring/summer, the eect would be to lower their annual pay.
The current topdown system of determining the spring/summer budget (which
indirectly determines the number of courses a department can oer) places a high
emphasis on predictability. The provost, the administration person in charge of budgets, can fairly accurately predict the expenses for spring/summer. The shortage of
oerings encourages early enrollments because students want to be sure to have a
place in the class of their choice. Consequently, the provost can rather accurately
predict revenues, which makes the current system very good for planning purposes.
The current system is also fairly easy to administer. There are not many contingent
course oerings, i.e. courses added as student demand dictates. This, in some ways,
makes a department heads job easier, as he or she is not scrambling at the last minute
to nd faculty (full-time or adjunct) to cover the additional sections. The department
head is also better able to predict the costs of the spring/summer schedule. The current
system, given the low number of changes, also means that the published course
schedule is relatively reliable and there is less paperwork in a variety of oces.
The failings of the current system tend to relate more to marketing and to longerrange concerns of the university. The current system fails to respond to student
needs. Given the competition in higher education, being unresponsive can be very
harmful in both the short-run and the long-run. Students cannot be certain of which
courses will be added, so their schedules are aected adversely. The current system,
while making it easy in some ways for the department heads, is also frustrating for
them because they cannot act on their knowledge of student demand.
Budgeting for spring/summer should probably be done on a combined topdown/
bottomup basis, using the knowledge and goals of all parties concerned. The
department heads are currently in an untenable situation. They are held responsible
for meeting a xed budget, but not given credit for revenues generated with tuition
or fees. The best way to reduce costs is to oer no courses, so the incentives motivate
department heads in non-optimal ways. The administration could clarify its goals

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and long-run strategy by sharing the basis for their FTEF allocation with department heads.
In my classroom experience with this case, I have found students to be creative in
proposing alternatives. I require that any proposal be discussed in terms of its
strengths and weaknesses and likely implications for students. The most frequent
proposal from students is that additional courses beyond those currently oered
could be scheduled on a marginal cost recovery basis. This would allow department
heads to use their knowledge of student demand, to be responsive to students, and to
exercise their judgment over which courses generate greatest demand during spring/
summer. Department heads are most likely to know which spring/summer course
oerings might simply cannibalize the fall or winter schedules. Control by university
administration would be fairly simple to exercise. Beyond a certain number of
courses, dened by the base budget, actual revenues and costs could be easily compared to see if department heads had appropriately determined course oerings.
Such a plan also forces the department heads to think carefully about which faculty
will sta spring/summer courses, as the salaries vary widely and thus, the required
enrollments also vary widely. Are the best paid faculty likely to attract the necessary
number of students to recover the costs? If not, how can department heads sta other
courses so as to guarantee marginal revenues will exceed marginal costs?
As always, performance criteria must be considered carefully since some criteria
could sub-optimize the overall goals of a department or university. For instance,
average class size would have to be monitored for consistency over time. This would
guard against department heads converting classes that formerly were taught in medium-sized sections (2040 students) to mass lectures in order to reduce the cost of
faculty pay. And to guard against departments oering many spring/summer classes
in order to increase their faculty salaries (the extra 10% salary per course), the
departments would have to be monitored to ensure that fall and winter oerings
did not decrease because students were taking courses during spring/summer. The
benet to students in such a program is quite clear and could have long-term positive
eects on the reputation of the university as a student-friendly organization. It might
also increase the revenues from students enrolled at other universities who attend
Compass Point University only during spring/summer.
In the long run, the university could consider moving to a year-round calendar.
The University could decide to take a less hands-on approach in the short-run
and give three to ve year productivity and cost eectiveness measures to departments and colleges, and delegate more responsibility for decision management downward. Another approach that could be taken is to call for a serious study of what
costs could be reduced if the University were to close facilities during the spring/summer semesters and to study the marketing impact of such closures on enrollments.
Compass Point State University, Faculty Council Report, Comparison of marginal
revenue and expenditures spring/summer 19931999
In this report, we include only marginal revenues and expenditures directly attributable to instruction. Tuition, the only revenue, has been reduced by 1% to allow for

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355

bad debt. No portion of the states appropriation to the University or of student

registration fees is included in the revenue. The only expenditure is faculty salaries
and benets paid to tenure-track faculty and adjunct lecturers hired to teach courses
during spring/summer. In the table below dollars are presented in thousands.

Spring
Tuition revenue 1% bad debt
Faculty salary and benets
Spring excess
Summer
Tuition revenue 1% bad debt
Faculty salary and benets
Summer excess
Total excess rev. over expenses

1999

1998

1997

1996

1995

1994

1993

4293
3297
996

4489
3346
1143

4350
3295
1055

4301
3377
924

4143
3235
908

4029
3201
828

3827
3365
462

2076
1454
622

2161
1444
717

2198
1365
832

2181
1561
620

2143
1509
635

1931
1364
592

1750
1482
379

1618

1860

1887

1544

1543

1420

841

Compass Point State University, Faculty Council Report, General fees revenues spring/
summer 19991995
As the faculty council looked more closely into the issues of spring/summer costs
and revenues, they realized that General Fees can be substantial, so from 1995 they
added this revenue source to their annual report. The general fees are listed below,
given in thousands, and are for both spring and summer combined. Since students
were told nothing about these fees in the case, the numbers are not included in
the chart above. The general fee revenues increase any marginal economic benet
of spring/summer courses to the University.

General fee revenue 1% for bad debt

1999

1998

1997

1996

1995

827

812

759

745

764