Costing and Financing in Open Schooling/How Student Numbers Affect Costs/Total Costs
So far, we have looked at different categories of cost and discussed how these behave in isolation from one another. In terms of budgeting and cost management, though, it is the total expenditure on a course that is of greatest importance. The term total costs refers to the sum of fixed, variable and semi-variable costs. However, to start with, we will look at a simplified equation wherein semi-variable costs are treated as either fixed or variable.
The basic equation for Total Costs is:
- TC = F + (V × N)
- TC = total costs
- F = fixed costs
- V = variable costs per student
- N = number of students
Variable costs are often estimated on the basis of expenditure per student for materials, labour, equipment, etc. For this reason, it is necessary to multiply the unit cost per student by the number of students to determine the total variable costs. However, if your budget estimates or accounts of actual expenditure show total variable costs, it is not necessary to calculate the unit cost per student. Instead, you can simply add total variable costs with total fixed costs to arrive at the overall total cost for a specific number of students, whether notional or actual.
Exercise 2.1 Open the Hülsmann CD-ROM.
- Select Section 3 – Elements of cost analysis.
- Go to the bottom of the first page of this section and select Part 2 – Fixed & variable costs.
- Scroll down to Activity A9 – Exploring the Total Costs Equation and click the purple letters that read ‘Click here’.
- Follow the instructions in the MS Excel worksheet.
There are two key lessons to learn from this exercise, especially when we compare the costs of ODL with conventional education:
- In terms of their impact on total costs, sooner or later, variable costs are more decisive than fixed costs.
- Even when an ODL course starts with a higher level of fixed costs than conventional education, if its variable costs are lower, then you will always arrive at a point where the total costs for ODL are lower for a given number of students.