Cost and Financing in Open Schooling/Some basic Concepts of Cost Analysis/Fixed, Variable and Semi-Variable Costs

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Tutorial.png Unit 1 

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.

In cases where expenditure does NOT increase or decrease with changes in the level of productive activity, then this is categorised as a fixed cost. For example, regardless of whether an ODL institution has a hundred registered students or a hundred thousand, it needs to employ a chief executive officer (CEO) or director. Although the duties of the post and the salary on offer would very likely be different in the two situations, the salary of the CEO is considered a fixed cost.

By way of contrast, a variable cost is any expenditure that varies in proportion to a change in the level of activity. Expenditure for printing study materials is a good example of a variable cost. For each additional student enrolled for a course, extra expenditure is incurred.

Some costs seem stable for a particular level of activity, but suddenly increase with a significant increase in student numbers. For example, most ODL institutions have policies regarding the maximum number of students who can be accommodated in a class group for face-to-face tutorials. When student numbers exceed the maximum, then a second class group is formed, necessitating the employment of another tutor (or additional hours for the same part-time tutor). The term semi-variable cost refers to such expenditure which remains fixed within a particular level of productive activity, which is referred to as the range. If the level exceeds this range, then additional costs will be incurred.

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Exercise 1.1.3: Refer to the list of costs that you wrote out for Exercise 1.1. Decide whether each cost should be categorised as fixed, variable or semi-variable. In the next blank column, write either ‘F’ (for Fixed), ‘V’ (for Variable) or ‘S-V’ (for Semi-Variable).

Sample Answer: Refer to the following file to see some examples of how different costs can be categorised as either fixed, variable or semi-variable:[[File:Exercise_1[1}3_Sample Answers|Frame|Exercise_1[1]3_Sample_Answers]]
Insert hyperlink to MS Word file: Exercise 1.2 Sample Answers.doc Please retain your work for future use.

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.