Module 2 - The Techniques of Cost Analysis
This module focused on the text by G. Rumble, “The costs and economics of open and distance education.” My first thought was what a complicated topic to comprehend, but the more I read the more clearer it became. It is amazing how much goes into a course before it even gets off the ground. What I am referring to is the cost analysis. We studied this topic in three parts 1) how to do a budget 2) dealing with capital costs, and 3) working out the basic equations.
We used the “ingredients approach” to put the budget together. Thus, similar to a recipe, include all that is needed. In using this approach, there are a multitude of “ingredients” to consider, such as :
· course overheads: management and secretarial support
· print items: study guides and other print materials, taking into consideration editing, design, and copyright (which can be pricy)
· multimedia such as CD’s which would include the costs to design and the cost to produce, maintenance costs, hence preparing the printed materials which would be the actual person(s) who created it along with designing and editing it
· someone to grade the assignments
· tutor(s) and their expenses
· replication and distribution including preparing (production), packaging and postage (distribution). We actually completed a mock assignment and then a graded assignment on cost analysis - so much information to comprehend in a short time frame! As both scenarios were from a perspective of online, additional thought must be given if the course would be offered in a face-to-face environment which would include, but is not limited to the following: the premise (actual classroom), equipment, furniture, and supplies. As I worked on the budget(s) it became clear that the ingredients could be broken down into categories: fixed and variable, capital and operating. As I prepared the budget I came to realize it must be looked at as a dynamic process due to the variables in particular the number of students - the more students that take the course, the more resources (print materials, CD’s, and the like) will be needed. The two scenarios provided did not encompass many multimedia needs, but consideration would need to be given to others such as radio and/or tv production, which would tend to be more expensive. Another important issue to be taken into consideration is using the computer. In my thinking there could be the need to purchase a learning management system such as Blackboard and more complex multi-media tools (software). Fortunately an online chat tool such as Skype is free. As I worked on my budget, many things kept running through my head in a real-world scenario: 1. What it there would not be enough students and the course would be cancelled - What a loss of human effort.
2. What it there are enough students to take the course and than by the end of the first second, or third weeks, many withdraw from the course?
3. To be successful is dependent on the number of students and it will always be variable. Hence some costs are sensitive to volume.
4. For multimedia - What should I choose? Obviously I would look for items that would be free or little cost such as Skype. If I would need Microsoft software there is a site that offers simple versions online.
5. In regard in multimedia such as CD’s they may be relatively cheap to provide, but the shipping and handling may be cost prohibitive. The cost analysis assignment(s) made be learn the following definitions:
· fixed costs - buildings
· variable costs - items used by students
· capital costs - items used for more than 1 year such as the building and furniture
· operating costs - staff members such as managing director and secretary While I am definitely not a math whiz, I was able to do the equations in figuring these costs. In using depreciation, there are certain terms that I needed to clarify/define: simple deprecation, social discounts, and annualization. Simple depreciation is just that - divide the costs by the number of years being used, In essence, the longer an item (such as a computer) is used, the more it depreciates and the less valuable it becomes. Social discount- I’m a bit confused on this, but here is my thinking: as an item is depreciated each year, there is still an undepreciated remainder that needs to be addressed as it varies over the years. Consequently there is a variation in forgone interest. Annualization takes into account the foregone interest, but produces identical rates over the period. Annualization is useful to financial analysts to foresee an economic forecast and thus, a company’s financial health and ballpark figure probable earnings. Generally this could be a good thing to forecast the returns over a year, however with the volatile stock market nothing is average, thus highly inaccurate. Annualization is also handy for those companies that are required to make estimated tax payments, thus they can annualize their current profits in order to ensure correct payments to the Internal Revenue Service. Here are some other equations that I found necessary in doing a cost analysis:
TC= F+V*N
TC=Total Costs
F=Fixed Costs
V=Variable costs (per student)
N=Number of students TC is actually a function of N, hence total costs depends on the number of students so the equation could be revised to read: TC(N)=F+V*N From a graphing standpoint V correlates with the slope of the graph of TC. Thus, the higher the value of V, the steeper the curve. In comparison F affects the plateau. In reality, institutions would like to see a lot of students enrolled while keeping total costs down. When I did my graph I was able to visualize this concept and see the intersection or break-even point. Doing the cost analysis demonstrated that one would potentially take a less (maybe more than 1 year) before seeing a turnaround in profit. An equation important is average costs. Average costs per student= total costs/ number of students
AC=TC/N
AC (F+V*N)/N= (F/N)+(V*N)/N
AC=Average costs
F=Fixed Costs
V=Variable costs per student
N= Number of students This equation is important for economics of scale. In particular what happens with the number (N) of students? Simply put as the number of students increase, the average costs decrease (the less each student has to pay). The concept was demonstrated in my graph. Taken this into consideration AC cannot fall below V and the behavior of N is influenced by V and F. As I was able to get my graphs to work out, I surmised that even though it would be ideal to have a large number of students, there are other considerations that need to be taken into account such as: 1. Attracting more students potentially may require a bigger marketing budget
2. How will the influx of students be handled? This could be from an administrative (non-academic) or learner support (academic) We also had discussion about semi-variable costs, thus costs that are fixed to a certain point. An example would be hiring another tutor if the number of students is increased. The equation is SV = (N/G) * SN
SV = semi variable cost
G = group size
V = variable costs per student
N/G = number of students (rounded)
SN = semi-variable cost per group In knowing this, the total equation can be changed to: total costs = fixed costs + semi-variable costs + variable costs. To summarize, this has been a tough module to complete. The project encompassed critical thinking and also a bit of knowledge to use Microsoft Excel. Thank goodness I had Excel knowledge and was able to create the graphs that allowed for visual presentation. I know there was a reason I was not an accounting major. Yet, I am so much more knowledgeable as to all that encompasses a budget and also the terms deprecation and annualization. Reference:
In my reading, I noted the importance of identifying capital costs and operating costs. Capital costs tend to be non-recurrent such as the building and its furniture, whereas operating costs are consumed within a certain timeframe. This is important to distinguish for deprecation.
Rumble, G. (1997). The Costs and Economics of Open and Distance Learning . London : Kogan Page.
