Incentive Effects of Cost Allocations
Eastern University prides itself on providing faculty and staff a competitive compensation package.One aspect of this package is a faculty and staff child tuition benefit of $4,000 per child per year for up to four years to offset the cost of a college education.The faculty or staff member's child can attend any college or university,including Eastern University,and receive the tuition benefit.If a staff member has three children in college one year,the staff member receives a $12,000 tuition benefit.This money is not taxed to the individual staff or faculty member.
Eastern University pays the benefit directly to the university where the staff/faculty member's child is enrolled or if the student is attending Eastern,it reduces the amount of tuition owed by the faculty/staff member.The university then charges this payment to a benefits account.This benefits account is then allocated back to the various colleges and departments based on total salaries in the college or department.
Evaluate the pros and cons of the present university accounting for tuition benefits.What changes would you recommend making?

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The Answer is Solution to Incentive Effects of Cost Allocations (20 minutes)
Pros: The major advantage of the tuition benefit is that it provides tax-free income to faculty and staff.This can reduce the total compensation cost to the University by the amount of the tax savings,or else the staff receives a windfall gain if their base pay is not adjusted to reflect this additional income.
The current accounting treatment via the benefits account is simple.College tuition benefits are not completely "free" to each college.When making hiring decisions,deans of the colleges will take into consideration the average cost of the tuition benefit.If a large number of faculty/staff in one college are drawing the benefit,their budget is not unduly burdened in this year.
Cons: The problem with the present scheme is that the individual colleges are not charged with the actual cost of the tuition benefits they generate.Deans have incentive to hire staff with college-bound children since they do not bear 100% of the cost.Salary administration is made more difficult.Since a particular dean does not pay the full cost of the tuition benefit of each individual faculty/staff in his or her college,the dean is not aware of the benefit the faculty/staff is drawing,and thus is less likely to adjust the base pay,making it more likely that the faculty/staff receives a windfall gain from the tuition benefit.The deans of each college do not take into account the full cost of hiring/retaining a staff/faculty member with several college-bound children.
Proposal: Each college should be charged for the actual tuition benefits paid for children of faculty/staff in its college.