This simple costing model has generally been effective for campus-based academic programs since the costing model has become widely accepted industry practice by many higher education systems. However, traditional assumptions, like service to mission area and the intrinsic value of general education, have rendered such models largely ineffective for determining long-term program viability. In addition, many important campus elements are not accounted for in the traditional model, and often the model is applied retrospectively rather than as a projection of future program strength and costs (League for Innovation, n.d.). This problem is obviously complicated by the dumping of unique constraints and costs of distance education onto a traditional higher education environment. Many institutions of higher education have struggled with the assumptions that should be made about distance education units. Within institutions, it is imaginable that different stakeholders could envision their distance education unit as serving a variety of operational (and not mutually exclusive) agendas:
Distance education as traditional academic/public service to a mission defined area,
Distance education as a consumer product,
Distance education as a strategic response to address budget constraints.
Several costing models for distance education units have been described in the literature, but most models offer no comparative analysis between traditional analyses of ROI and cost. Table 1 details several of the models, costs included, and costs not included.
Simple Costing Model
The simple costing model for distance education units builds on the assumption that only direct instructional costs are attributable to the program (Figure 1). The obvious benefits to the simple costing model are simplicity and familiar application for determining viability for on-campus programs.
There are significant downsides to the application of the simple costing model for distance education unit costs and return. Application of the simple costing model will result in significant costs, many directly resulting from the increased direct expenses, not appropriately applied to the increase in credit hour productivity. By its very nature, distance education operations require large investments to build the technological infrastructure for course design and delivery. While this technology infrastructure can be utilized for on-campus programming, a substantial portion of the cost should be allocated as cost against revenue generated by expansion of credit hour production. Other fixed costs of the institution are also not allocated to the generation of additional credit hour production: academic support, administration, advising, brick and mortar infrastructure, institutional computing, instructional design, library access, marketing, and scholarships are not appropriately charged against revenue in the simple costing model. Application of the simple costing model will likely result in liberal costing estimates, thus making distance education credits appear less expensive than traditional on-campus credits.
Unit Costing Model
The unit costing model is an outcome of the assumption that all credit producing units must share in the fixed and variable expenses related to the enterprise as well as the unit. In this model, a percentage of all costs are allocated to the distance education unit, in addition to any direct instructional or indirect costs involved with the unit. Under the unit costing model, sunken overhead costs of office space, administrative personnel, campus infrastructure, and institutional computing resources are charged off against every credit hour produced. Overhead costs that are unique only to the on-campus environment (i.e. repair of a classroom building, grounds crew, museum operations) would not be appropriate to allocate against a distance education offering. Some institutions may find it beneficial to incorporate another classification of costs under the unit costing model - opportunity costs. The unit costing model would be expressed as:
Figure 2. Unit costing model.
Percentage of institutional fixed costs (academic support, administration, campus infrastructure, institutional computing, library access) +
Indirect costs (advising, instructional design, marketing, scholarships) +
Direct instructional costs (faculty salaries and benefits, operating expenses)
--------------------------------------------------------------------------------------------------
Student credit hours (SCH) produced
The unit costing model clearly allocates resources that are left out of the simple costing model equation, perhaps to an excess. Under the unit costing model, the discussion really focuses on those existing campus resources that are utilized by the distance education unit (students or faculty) as those expenses are likely much larger than the direct instructional costs and the indirect costs. The beneficial aspect of this model is that any existing resources and direct and indirect costs utilized by the distance education unit are considered as costs. Application of the unit costing model will result in a conservative costing estimate, perhaps making distance education credits look more expensive than production of traditional on-campus credit
Marginal Costing Model
The colloquial expression that "the truth lies somewhere in between" may best summarize this approach. The marginal costing model grows out of the assumption that the traditional brick and mortar operations of the enterprise are sunken costs and necessary whether the distance education unit operates or not. Attributable costs under this model count only those additional expenses added as a result of the additional credit hours produced by the distance education unit. Under the marginal costing model the direct instructional costs, indirect costs, and any additional fixed costs (i.e. additional support personnel, new advisors, expanded online library resources) are counted as costs against the distance education credits produced. The marginal costing model has a strong basis in the accounting and economic literature, named incremental cost analysis in those disciplines (Douglas, 1992; Horngren, Datar, & Foster, 2002). The model is expressed as:
Figure 3. Marginal costing model.
Added institutional fixed costs (academic support, administration, campus infrastructure, institutional computing, library access) +
Added indirect costs (advising, instructional design, marketing, scholarships) +
Direct instructional costs (faculty salaries and benefits, operating expenses)
--------------------------------------------------------------------------------------------------
Student credit hours (SCH) produced
The marginal costing model allocates only those additional resources needed, going beyond the simple costing model. Since only added costs appropriate to the distance education unit are attributable, costing discussions are constrained to actual costs incurred relative to the additional credit hours generated. Application of this costing model in determining return on investment of the distance education unit will result in a moderated incremental estimate, falling between the liberal (simple costing model) and the conservative (unit costing model).
Task 2
Present a project cost estimation associated with constructed facilities. What constitutes Capital Costs and Operation & Maintenance costs, explain its magnitude and importance.
The costs of a constructed facility to the owner include both the initial capital cost and the subsequent operation and maintenance costs. Each of these major cost categories consists of a number of cost components. The capital cost for a construction project includes the expenses related to the initial establishment of the facility.
Maintenance, repair, and operations (MRO) or maintenance, repair, and overhaul involves fixing any sort of mechanical, plumbing or electrical device should it become out of order or broken (known as repair, unscheduled or casualty maintenance). It also includes performing routine actions which keep the device in working order (known as scheduled maintenance) or prevent trouble from arising (preventive maintenance). MRO may be defined as, "All actions which have the objective of retaining or restoring an item in or to a state in which it can perform its required function. The actions include the combination of all technical and corresponding administrative, managerial, and supervision actions."
Capital costs are fixed, one-time expenses incurred on the purchase of land, buildings, construction, and equipment used in the production of goods or in the rendering of services. Put simply, it is the total cost needed to bring a project to a commercially operable status. Whether a particular cost is capital or not depend on many factors such as accounting, tax laws, and materiality.
No.
Occupiable Area
Quantity
Space Required
Sum Action Cost
Attendee Facilities
Conference Reception
2
500
RM 3,000.00
Large Lecturer room (seating 120)
5
5,000
RM6,000.00
Meeting Room Storage
2
160
RM 2,000.00
Computer Training Lab
1
200
RM4,000.00
5,860
Library
Reference Desk
2
80
RM1,000.00
Reference Computer Terminals
2
80
RM1,200.00
Lounge Seating
100
200
RM1,300.00
Table Seating
10
320
RM1,000.00
Reference Stacks
3
120
RM 800.00
Audio Lab
1
200
RM 1,000.00
Work Room
1
200
RM 500.00
Store Room
1
300
RM 500.00
1,500
RM 21,300.00
Kitchen
Dining Area (100 seats)
1
300
RM 1,000.00
Bakeshop
1
100
RM1,000.00
Range/Grill
1
400
RM2,000.00
Services
Toilets (Male)
5
100
RM2,000.00
Toilets (Female)
5
100
RM2,000.00
200
RM4,000.00
Total Usable Area
RM12,000.00
Total Square feet of area
Total Sum
7,960 Sq Feets
RM33,300.00
Task 3
In a service oriented industry like Olympia College, propose on possible routine cost reports that has to be accomplished regularly by the finance officer during the construction of facilities, and how it is to be accomplished, prepare a sample format.
Cost Report
Program Title:
Cost Report prepared by:
Year:
No.
Cash Book Expenditure
1.
Conference @ Classrooms
RM11,000.00
2.
Computer Training Rooms
RM4,000.00
3.
Kitchen Maintenance
RM2,000.00
4.
Research Materials
RM2,000.00
5.
Wardrobe
RM2,000.00
6.
Security
RM1,000.00
7.
Services
RM4,000.00
8.
Stationary & Copy
RM3,000.00
9.
Management
RM2,000.00
10.
Stationary Cost
RM1,300.00
Total
RM33,300.00
Task 4
Considering the possible costs to be incurred, from the construction of facilities to the first year of operation, calculate and evaluate indicators of productivity, efficiency and effectiveness of the 2015 expansion.
Variance analysis
Maintenance cost on PC
Budgeting : PC breakdown 30 x RM20 cost & repair :RM 600.00
Actual : PC Breakdown 25 x RM22 cost & repair: RM 550.00
(unfavorable the cost increase to RM2.00)
Cost Variance : Difference RM2 (budgeting Volume)
Maintenance cost on Chairs
Budgeting : Chair breakdown 50 x RM15 cost & repair :RM 750.00
Actual : Chair Breakdown 45x RM10 cost & repair: RM 450.00
(unfavorable the cost decrease to RM300.00)
Cost Variance : Difference RM300 (budgeting Volume)
Maintenance cost on Kitchen
Budgeting : Bakeshop breakdown RM500.00 cost & repair :RM 500.00
Actual : Bakeshop Breakdown RM600.00 cost & repair: RM 600.00
(favorable the cost increase to RM100.00)
Cost Variance : Difference RM100 (budgeting Volume)
Conclusion
With distance learning reaching a critical mass in higher education, the need for more robust models of costing and return on investment has never been greater. Historic models of cost estimating have proven successful for traditional programs, but these models often miss the unique expenses that must be appropriately allocated for successful profitability projections of distance education programs. The average 10-K annual report is stuffed with dozens of dense footnotes and adjusted numbers offered as alternatives to the recognized numbers contained in the body of the income statement and balance sheet. For example, companies often disclose six or eight versions of earnings per share, such as the "as reported," "adjusted," and "pro forma" versions for both basic and diluted EPS. But the average individual investor probably does not have the time to fully assimilate these documents
