Cost analysis in Education

1. Cost Analysis in
Educational Planning
P. Geetha Rani
National University of Educational
Planning and Administration,
17-B, Sri Aurobindo Marg,
New Delhi 110 016.

2. Why cost analysis? 1
* Educational planning in general and
planning for resources in particular
* Estimating the resource requirements for
education
* Mazumdar Committee(1999) Rs.137,000
crs -75 million out of school children
* SSA – Rs.63,000 crs. for achieving
universal elementary education

3. Why cost analysis? 2
* Sound decision making with regard to
inter - sectoral and intra-sectoral
allocation
* Monitoring and improving the utilisation of
resources
* Institutional planning in the optimum
allocation of resources (average and
marginal cost principles)

4. Why cost analysis? 3
* For analytical purposes
* to measure internal and external efficiency of
investments in education
* inequalities in education

5. Cost and Expenditure 1
* Cost - value of all inputs that go into the
education process
* expressed in money / real / physical terms
(eg Value of student’s time )
* Expenditure is the amount of money spent
on educational activities

6. Cost and Expenditure 2
* Expressed only in money terms (eg.
Expenditure on textbooks, uniform, etc)
* Expenditure = cost if value of all inputs
are expressed in money terms.
* Possible only for few items of expenditure, eg
expenditure and cost of books can be the
same, expenditure on equipments and cost of
equipments.

7. Cost and Expenditure 3
* Always total expenditure < total cost if
money is not spent on some of the costs,
eg. Foregone earnings not included in
expenditure. This is the case in most of
the times as cost included opportunity cost
of students
* Cost is a much broader term than expenditure
* Expenditure > cost if expenditure
includes more than costs of education.
Possible only on few items of expenditure,
rare phenomenon

8. What constitutes cost in education?
D ire ct co st In d ire ct co st
(fo reg on e ea rnin g)
In d iviu d a l co st
F ixe d / n on -re cu rring
/ ca pita l co st
V a ria ble / recu rring
/ cu rre n t co st
In stitu tion a l co st
T o ta l (S o cia l )
C o st

9. Individual Cost 1 - Direct Cost
* Fees
* Tuition fee
* examination fee
* other fee and payments

10. Individual Cost 2 - Direct Cost
* Other household (out-of-pocket)
expenditure
excluding fee
* books, stationary, uniforms,transport,
private coaching, boarding and lodging,
etc
* Also referred as maintenance cost / living
expenses

11. Individual Cost 3 - Indirect Cost
* Foregone earnings - when the child goes
to school forgoing its earning in the labour
market - indirect cost
* Opportunity cost of a child in the age
group 14-17 is the wage of the child in the
same age group in the labour market

12. Individual Cost 4
* Source of information: from household
surveys
* Household expenditure on education
estimated by household and individual
characteristics
* (eg social, economic, ethnic groups; by
gender; rural and urban)

13. Institutional Cost 1
* Incurred by institutions (government,
govt. aided and private aided
institutions) - public cost
* Fixed / non-recurring / capital cost -
incurred at a point of time (eg.
Purchase of land, building, equipment,
furniture, etc)
* Fixed Costs do not vary with a change
in the enrolment

14. Institutional Cost 2
* Fixed cost changes when scale / size of
institution changes
* For a small increase in enrolment, there is
no change in fixed cost
* variable / recurring / current costs -
incurred every year; changes with
enrolments (eg. Salaries to teachers,
scholarships, mid-day meal, etc)

15. Institutional Cost 3
* scale of operation / size of school and size
of incremental changes determine whether
the cost is variable / fixed cost
* Source of information: Education in India,
Analysis of Budgeted Expenditure on
Education, MHRD.
* aggregate expenditure only

16. Social or total cost of education
* individual cost + institutional cost
* no double counting of any item such
as transfer from the institution to
individual eg. scholarships and
transfer from student to schools like
fees
* net of transfers

17. Relationship between Individual and
Institutional Cost 1
* Institutional investment - provides
educational facilities
* Individual investment - makes possible to
utilise the services
* inter-related and inter-dependent - in the
absence of either of them - under-
allocation of resources for education

18. Relationship between Individual and
Institutional Cost 2
* Less institutional cost and more individual
cost would result in over-crowded class
rooms
* High institutional cost and low individual
cost would result in empty class rooms
* There needs to be a proper match
between the two

19. Relationship between Individual and
Institutional Cost 3
* time-horizon aspects of the two costs –
eg. Expenditure on buildings and
expenditure on stationary
* Individual cost – the perspective is limited
to present generation
* Institutional cost – a very long term
perspective spread over more than one
generation

20. Unit cost
* Unit cost = unit recurring cost
+ unit capital cost

21. Unit costs (recurring) 1
* Cost per student - average cost
* Normal unit cost = total cost /
enrolment
* cost per pupil enrolled; used in
planning at all levels of education
* Cost per pupil attending school = total
cost / number of students attending
school
* large gap between enrolment and
attendance

22. Unit costs (recurring ) - 2
* difference between normal unit cost and
cost per pupil attending school indicates
the wastage of resources due to drop-
outs
* Reflects internal efficiency of the system
(partly)

23. Unit costs (recurring ) - 3
* Effective unit cost = total cost / number of
passed students
* cost per successful student - useful for
manpower planning; relates cost with
performance
* difference between normal and effective
unit cost = wastage in education due to
drop-outs and failure

24. Unit costs (recurring ) - 4
* reveals internal efficiency of the
education system
* larger the gap, higher the inefficiency
* requires information on pass-outs
* crude methods of working out unit cost
- in the absence of relevant
information on enrolment;

25. Internal Efficiency of Secondary Education in
India
Ratio of
Ratio of
Effective
Appeared
to
Appeared
Normal Appeared Effective to Normal
1981 600 2693 5020 4.49 1.86 8.36
1985 906 3149 6158 3.48 1.96 6.8
1990 1564 5014 9774 3.21 1.95 6.25
1995 2392 8096 14600 3.38 1.8 6.1
1996 2635 9311 18448 3.53 1.98 7
1997 3580 10856 20631 3.03 1.9 5.76
1998 3255 11060 21226 3.4 1.92 6.52
1999 3898 12359 22229 3.17 1.8 5.7
2000 4594 11650 21551 2.54 1.85 4.69
Per student cost in secondary
Education (in Rs.)
Ratio of
Normal to
Effective

26. Unit costs ( recurring) 5
* cost per child of the relevant age group
for general education = total cost /
population of the relevant age group
* Similarly cost per child of the relevant age
group population by levels of education =
total cost of given level of education /
population of relevant age group

27. Unit costs (recurring) 5
* depending upon the purpose of coverage
* cost of education per capita = total cost /
total population

28. Total (Rs. In lakhs), Per Capita and Per Student
Expenditure (in Rs.) on Elementary
Education in Tamil Nadu
Elementary
Edn. Expr.
1990-91 62397 258 739
1991-92 73533 288 847
1992-93 73174 313 832
1993-94 80879 346 909
1994-95 88686 379 991
1995-96 109811 428 1224
1996-97 123222 464 1722
Per
Capita
Elem.
Expr. Per Stude

29. Unit capital cost 1
* Difficulty in estimating unit capital cost
- annualised capital cost
* = Total non-recurring cost /
enrolment
* = Annual rental value of the building /
enrolment
* Depreciation not considered

30. Unit capital cost 2
* Using the formula
* = [r(1+r)n
/ (1+r)n
–1] *I/ E
* Where r = discount rate
* n= life span of the asset
* I= Initial investment
* E = enrolment

31. Unit capital cost 3
* For example rate of discount is 12 % life
span of the building is 10 years, then we
get the value as 0.1769.
* If value of the building is Rs.2,00,000, the
annualised fixed cost is Rs. 35396.

32. Unit capital cost 4
* Example –2
* Value of building is Rs.2,00,000, rate of discount is 13
%, life span of the building is 25 years, then the
discounted value is 0.1364, Now the annualised fixed
cost is Rs.27285.
* Example – 3
* Value of computer is Rs.2,30,000, rate of discount 18
%, life span of the machine is 4 years, then discounted
value is 0.3717, Then the annualised fixed cost =
Rs.85500.

33. “Unit “in Unit Cost
* ‘Unit’ in unit cost – refers to students in
different forms – as an input or an output,
population, proportion of the relevant age
group.
* Can also be per class room, per school,
per teacher, etc
* Eg. To calculate costs of classroom equipment
such as tables, blackboards, globes, maps,
charts, etc
* classroom - appropriate unit.

34. “Time Dimension” in Unit Cost
* Generally calculated per year
* Can also calculate unit costs by level and
type of education
* Eg. Unit cost of primary education, unit cost of
upper primary education, etc
* Eg. Cost per working day, cost per teaching
hour – but may not reflect the full costs

35. Joint Costs
* Refers to cases where some costs are common to
the production of two or more outputs
* Eg. Costs on Directorate of Education or on the Ministry
of Education cannot be attributed to a particular level of
education
* Eg. In a secondary school – cost on building, salary of
the principal, cost on playground –is a problem – the
cost is distributed equally among all students

36. Types of Costs by Purpose 1
* By source
* Individual, institutional, social
* By type
* Fixed (non-recurring), variable (recurring),
capital, current

37. Types of Costs by Purpose 2
* By items
* Salaries, maintenance, repairs, teaching,
supporting material, books
* By functions
* Teaching activities, extra-curricular activities,
administration, health care, etc

38. Determinants of Unit Cost
* Age of the institution
* Size of the institution
* Class size (PTR)
* Teachers’ average salary
* Residential school

39. Relationship between Total, Average and
Marginal Cost
* TC = FC + VC
* Total cost is an increasing function of
enrolment
* Average cost (AC) declines as
enrolment increases upto a point and
then starts increasing – giving rise to
a ‘U’ shaped curve

40. Relationship between Total, Average and
Marginal Cost 2
* Marginal cost (MC) is additional cost
incurred on an additional student. MC also
declines as enrolment increases (but less
than AC) upto a point (where AC=MC) and
then starts increasing (but higher than AC)
giving a ‘U’ shaped curve

41. 0
2
4
6
8
1 0
1 2
1 2 3 4 5 6 7 8 9 1 0 1 1 2 1 3
Enrolment
AverageMarginalCost
Relationship between Average and Marginal
Cost 3

42. Relationship between Average and
Marginal Cost 4
* Analysis of the behaviour of AC and MC
provides valuable tips to educational
planner
* Constant Returns to Scale, where AC=MC and
AC remains the same regardless of enrolments

43. Relationship between Average and
Marginal Cost 5
* Economies of Scale, where AC declines as
enrolment increases because MC is less than
AC
* Diseconomies of scale, where AC increases
with increase in enrolment and MC is higher
than AC

44. Total, Average and Marginal Cost
(Hypothetical Cost Functions) 6
Number ofTotal Average Marginal
studentsCost(TC) Cost (AC) Cost (MC)
0 0 0 0
1 300 300 --
2 410 205 110
3 528 176 118
4 660 165 132
5 795 159 135
6 950 158 155
7 1108 158 158
8 1320 165 212
9 1620 180 300
10 1950 195 330
11 2220 202 270

45. Relationship between Average & Marginal Costs
of Education
0
50
100
150
200
250
300
350
0 1 2 3 4 5 6 7 8 9 10
AC MC
`

46. How is it useful in Educational
Planning?
* To Know the best size of the school – that
facilitates to understand whether the
resources are optimally utilized
* To know financial efficiency of the school -

47. Cost in Education: Current and Constant Prices 1
* Current prices data include inflation
* Time series data –dynamic in nature
* Constant prices – take care of inflation and
represents real costs of education
* How to convert the current into constant
prices?

48. Cost in Education: Current and
Constant Prices 2
* Deflating the values through deflators
* Deflators:
* National Income / State income
deflators
* WPI
* CPI
* Education Price Index

49. Cost in Education: Current and Constant
Prices 3
* Income Deflator = current income /
constant income
* Expenditure in constant prices =
Expenditure in current prices / income
deflator

50. Cost in Education: Current and Constant Prices 4
SDP-currentSDP80-81priceIncome def'=(2)/(3)Expr.Edn 80-81 prices
(1) (2) (3) (2)/(3)=(4)(5) =(5)/(4)
1980-81 7218 7218 1.0 281 281
1981-82 8677 8011 1.1 323 298
1982-83 8821 7578 1.2 411 353
1983-84 10222 7988 1.3 441 345
1984-85 12028 9033 1.3 522 392
1985-86 13682 9391 1.5 646 443

51.  Thank you