Problems in educational cost accounting and a new cost accounting approach are described in this paper. The limitations of the individualized cost (student units) approach and the comparative cost approach (in the form of fund-function-object) are illustrated. A new strategy, an activity-based system of accounting, is advocated. Borrowed from business accounting procedures, this method views activities in terms of their value-added potential. The steps of an activity-based cost-accounting system are outlined. Conclusions are that the functional cost-per-student systems have significant limitations and that no link has been demonstrated between function and performance measures. Activity-based cost accounting identifies what adds value to educational processes and what does not. Four tables and one figure are included. (Contains 13 references.) (LMI)