Cost Analysis in Education

1. 1
Cost Analysis in
Education
P. Geetha Rani
NUEPA
New Delhi

2. 2
Why cost analysis? 1
* 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)

3. 3
Why cost analysis? 2
* For analytical purposes
* to measure internal and external
efficiency of investments in education
* inequalities in education

4. 4
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

5. 5
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.

6. 6
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

7. 7
What constitutes cost in education?
D irect cost In d irect cost
(foreg on e earn in g )
In d iviu d al cost
F ixed / n on -recu rrin g
/ cap ital cost
V ariab le / recu rrin g
/ cu rren t cost
In stitu tion al cost
T otal (S ocial )
C ost

8. 8
Individual Cost 1 - Direct Cost
* Fees
* Tuition fee
* examination fee
* other fee and payments

9. 9
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

10. 10
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

11. 11
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)

12. 12
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

13. 13
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)

14. 14
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

15. 15
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

16. 16
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

17. 17
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

18. 18
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

19. 19
Unit cost
* Unit cost = unit recurring cost
+ unit capital cost

20. 20
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

21. 21
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)

22. 22
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

23. 23
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;

24. 24
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

25. 25
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

26. 26
Unit costs (recurring) 5
* depending upon the purpose of
coverage
* cost of education per capita = total
cost / total population

27. 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

28. 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

29. 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

30. 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.

31. 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.

32. 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.

33. 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

34. 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

35. 36
Types of Costs by Purpose 1
* By source
* Individual, institutional, social
* By type
* Fixed (non-recurring), variable
(recurring), capital, current

36. 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

37. 38
Determinants of Unit Cost
* Age of the institution
* Size of the institution
* Class size (PTR)
* Teachers’ average salary
* Residential school

38. 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

39. 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

40. 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

41. 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

42. 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

43. 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

44. 45
Relationship between Average & Marginal
Costs of Education 7
0
50
100
150
200
250
300
350
0 1 2 3 4 5 6 7 8 9 10
AC MC
`

45. 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 -

46. 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?

47. 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

48. 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

49. 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

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Summing up
Cost analysis in education is an important
technique essential for the educational
administrator for planning and utilizing
the resources more efficiently.
Thank You