CFOS Unit One
Some Basic Concepts of Cost Analysis
Any expenditure of money on materials, labour, equipment or services is referred to as a cost. Costs may be either notional or actual.
Like any education institution, open schools must spend money on a variety of things in order to provide courses to their learners. However, when compared to conventional education, the pattern of expenditure in ODL institutions is quite distinct. This unit looks at some of these differences and introduces a basic vocabulary for categorising and analysing costs incurred by open schools.
Systems Model of Open and Distance Learning
Rumble (1986, pages 15-17) proposes a simple model which looks at the operations in ODL institutions in terms of four inter-related sub-systems. The value of such a model is that it clearly identifies the main areas of activity in an ODL institution and defines the relationships between them. It also suggests an analogy between a factory producing items for consumption and the ‘quasi-industrial processes’ of an ODL institution. Just as in a factory, ODL involves the specialisation of tasks and the division of labour between different units.
The four sub-systems in Rumble’s model are:
- Materials Sub-System
- The first major sub-subsystem includes all activities involved in the design, production and distribution of self-instructional materials, whether these are primarily print-based or involve other media.
- Student Sub-System
- Once learning materials have been developed and distributed to learners, they are passed over to the Student Sub-system. This sub-system comprises all of the activities, staff and other resources that are involved in facilitating learning by students and managing their progress through a programme.
- Logistical Sub-System
- The Materials and Student Sub-systems are supported by other units which procure and manage resources for the institution. Those units which look after finances, human resources and information and communications technology (ICT) comprise the Logistical Sub-System of any open school, college or university.
- Regulatory Sub-System
- Finally, overall management and guidance comprise the Regulatory Sub-System, which is sometimes referred to as the ‘Brains’ of the institution. All activities related to strategic planning, policy formulation and monitoring the institution’s performance in meeting its goals are part of this sub-system.
Rumble’s model is illustrated in Figure 1a.
Unlike a conventional school or college, an ODL institution devotes a large part of its resources (staff time and office facilities, as well as funds) to its Materials Sub-System. Much of its expenditure on materials development is incurred before any students enrol for that course. On the other hand, an open school is not the same as an educational publishing company, because the ODL institution also includes a Student Sub-System which supports the learning process.
Direct and Indirect Costs
The costs of providing educational services through ODL can be classified in a number of different ways. Understanding the terminology used to categorise costs is important in analysing how they arise and how they will behave. The first distinction that must be made is between direct and indirect costs.
When a course could not go ahead without a particular item of expenditure, then it can be classified as a direct cost. If the relationship between an item of expenditure and the running of the course is less clear, then it should be categorised as an indirect cost. In some cases, a particular activity (and its related costs) can be attributed to two or more courses or products. For example, some ODL institutions run a workshop once a year to train writers for all their courses. Expenditure on such a workshop should be classified as a direct cost though, for the purposes of analysis, it will need to be apportioned to the different products.
In general, the more closely an activity (and its associated costs) can be linked with a particular course, the easier it is to determine that it is a direct cost. For example, printing study booklets for a given course is clearly a direct cost. As the association between the activity/expenditure and a product/course becomes more distant, it is increasingly difficult to link costs with a particular course or product. Nevertheless, when carrying out a comprehensive analysis of expenditure, it is important to apportion and attach indirect costs/overheads to different courses in order to determine the full cost of providing the service. Different ways of dealing with overheads are discussed in Unit 4.
Fixed, Variable and Semi-Variable Costs
Another way of categorising costs in ODL institutions is to consider whether a change in the level of productive activity (for example, by enrolling more students) has an impact on expenditure.
This exercise highlights the fact that, while many costs appear to be fixed at first glance, they are really semi-variable. Take, for example, the salary of the institution’s CEO or Director. When student numbers are low, the CEO will most likely have responsibility for many tasks related to the supervision of staff and the day-to-day running of the institution. However, if student numbers grow dramatically, it is often necessary to buy in specialised services or employ extra managerial or professional staff to take over some of these duties. Thus, even though the institution still has only one CEO, the job that he or she originally carried out has been split among a number of additional employees, with an accompanying increase in costs.
Committed and Managed Costs
A third way to categorise expenditure is based on the relative ease or difficulty of doing without the materials, labour or equipment that incurs a cost.
Where expenditure CANNOT be eliminated or cut back without a major negative impact on the institution’s objectives or profits (in the case of a commercial operation), this is referred to as a committed cost. For example, if an ODL institution entered into a long-term lease for additional office space to accommodate a planned expansion of its courses, it may be difficult to break the lease without a significant financial penalty. Likewise, once a staff member is confirmed as a permanent employee, it may be necessary to incur substantial expenditure in redundancy payments if the position is no longer necessary. In most cases, such expenditure should be categorised as a committed cost.
However, where expenditure can be delayed, reduced or eliminated without an immediate major disruption in the institution’s programme, then it should be categorised as a managed cost. For example, if resources are limited, it may be possible to postpone the revision of a particular course for one or more years. Staff training, foreign travel and entertainment expenses are often treated as managed costs.
A final concept that is important in any analysis of expenditure is that of a cost driver, which is defined as anything that causes an overall increase (or decrease) in costs when it increases (or decreases). Student numbers are the most obvious example of a cost driver. In addition, the number of tutorial groups drives the cost of tutors, since an increase in the number of groups necessitates the employment of additional tutors. Likewise, the number of study centres is a cost driver for several different items of expenditure. Decreasing the number of study centres has an impact on the amount paid for employing centre heads, leasing/renting/maintaining buildings, electricity for centres, ICT services, etc.
In order to analyse and control expenses, it is essential to identify all of the factors driving costs for a particular activity.