Treating the Capital Costs of Materials Development
Like any other capital asset, a course has a particular working (or useful) life. After a certain number of years, the materials will need to be revised substantially in order to keep abreast of expanding knowledge in the field or other changes to the curriculum or syllabus. Certain courses may not be viable after some time since they can no longer attract sufficient students. Thus, any projections of income and expenditure for a new course should include an estimate of its working life.
It is advisable to be conservative in estimating the working life of a course or programme. For example, even though you expect a course to last for seven years, it may be more prudent to base your cost projections on a working life of five years. Should the course remain viable without revision for the full seven years, then the institution will benefit from any unexpected income that accrues.
Unit 3 discussed several different approaches to depreciate or account for the fall in value of course materials over the life of a course. Two methods – Simple Depreciation and Annualization – were recommended.
Table 6b provides an example that illustrates the difference between the use of the Simple Depreciation and Annualization methods. In this particular case, the expected life of the course is six years. The ODL institution begins to incur expenditure for course development two years before any students are enrolled, while some activity (e.g. recording of radio broadcasts) continues into the first year of presentation. After three years, significant shortcomings are discovered in some of the study materials, requiring additional expenditure of Pula 40,000 in Year 4 for re-writing and the preparation of supplementary resources.
Using the Simple Depreciation method, the initial capital investment of Pula 180,000 is divided by the expected life of the course to yield an annual loss of value of Pula 30,000. However, because the additional expenditure for course revision only takes place in Year 4, it must be depreciated over a shorter period. Thus, it is divided into two equal parts and added into the calculation for the final two years of the course.
Alternatively, the value of the course could be depreciated using the Annualization method, which takes account of both simple depreciation and the lost opportunity to invest the money and earn interest. In the example shown in Table 6b, the average rate of interest for the life of the course has been projected at 8.00%, which yields an annualization factor of 0.216. When the initial capital investment is multiplied by the annualization factor, a figure of Pula 38,880 is obtained which represents the annual loss in value for the course.
It is necessary to calculate a new annualization factor for the additional costs incurred for revision in Year 4, since these must be depreciated over a period of only two years. When the total additional amount is multiplied by the new annualization factor (0.561), a figure of Pula 22,440 is obtained. This is added to the original figure of Pula 38,880 to yield the total annual loss of value for the final two years of the course, as shown in the bottom line of the table.
When these figures are compared with the amount derived through the Simple Depreciation method, it is clear that the annual loss in value of the course materials would be considerably higher using the Annualization approach.
As discussed in Unit 3, the Simple Depreciation method may be used where funds have been set aside for the development of a particular course and cannot be used for any other purpose. On the other hand, when funding has not been ‘ring-fenced’ or when you are comparing the relative costs of two or more alternative uses, then the Annualization method provides a more accurate picture.