Direct and Indirect Costs

Unit 1

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.

The term direct cost refers to any expenditure that CAN be directly related to a particular product or service. For example, many open schools employ part-time workers to mark assignments submitted by students. The fee paid for this task is an example of a direct cost since it can be directly linked with a specific course.

An indirect cost, on the other hand, is any expenditure that CANNOT be directly related to a particular product or service. Indirect costs are often referred to as overheads. Examples of indirect costs include rental or maintenance of offices, general office equipment, and the salaries of support staff, such as the institution’s chief accountant or the secretary for its director. It is difficult to link expenditure on these things directly to any of the institution’s courses or programmes.

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.

Activity

Exercise 1.1.2:Look at the list of costs that you wrote out for Exercise 1.1. Decide whether each cost should be categorised as Direct or Indirect. In some cases, the expenditure may be direct cost in some cases, but indirect in others. In the first blank column, write either a ‘D’ (for Direct), an ‘I’ (for Indirect) or ‘D/I’ (for either Direct or Indirect, depending on the circumstances

Sample Answer: Refer to the following file to see some examples of how different costs can be categorised as either direct or indirect [[Image:Exercise_1[1}2_Sample Answers|Frame|Exercise_1[1]2_Sample_Answers]]
Please retain your work for future use.

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.