In what different ways ‘cost’ is defined in distance education ? What is marginal and average costs, and fixed and variable costs in distance education?
Managing costs in distance education needs an understanding of the types of costs incurred as well as the cost functions, i.e., what are the inputs and output variables and methods of computing these costs. In short, just like any other process, the focus on cost effectiveness and cost efficiency is a must, as lowering the cost and increasing the benefits improves the value of the process and its outcomes.
Cost is a mathematical function, and in order to be precise, it needs to consider all the inputs that contribute to the cost of delivering distance education. Distance education is about scale, and hence, it should help understand how the output or the cost gets impacted by the inputs, such as the number of learners enrolled. In short, a measure like “economies of scale” is a good point of view to have. Education is a significant economic expenditure (around 3.5% of India’s GNP), and it is undoubtedly a significant proportion of national expenditure, perhaps second only to national defense. This makes analysis of educational costs for efficiency and effectiveness all the more necessary to understand where the money is coming from and how well it is being spent. For instance, are the right educational resources being allocated in the right sectors or regions for securing growth; or what factors are major ones in terms of influencing these costs; or what are the critical sources of funds that can be tapped, etc.?
Consider the distance education function as an outcome of a process. Just like any other process, it has its own inputs and outputs. Educational institutes, just like any other firm, transform these inputs into outputs and, in this process, add value to the customer or consumer of their products and services (satisfying the need for new cognitive abilities of the buyer or customer). Outputs are the courses delivered and students transformed (gaining new knowledge and/or skills) as consumers of these courses (services, products). The production of these courses involves human resources like faculty members and non-human resources like ICT, Printing Machinery, Stationary Material, Office or Workplace Building/Infrastructure etc. Hence, the educational institutions have their own trade-offs in terms of acquiring these resources at a monetary value instead of making expenditure for other alternatives (for different products or goods i.e. alternative transformation opportunities).
So, one of the ways to look at the cost of distance education is to look at it from the lens of various activities that are performed and do activity-based costing. It could be logically summed up around clusters of activities (activity centers). The cost of these activity centres, when added, could provide the total cost. Having activity centres helps understand how these activities contribute to the cost and how they could be made more efficient and effective. The other perspective is to look at the overall cost with its components split as direct or indirect, i.e., fixed and variable costs. Another useful perspective is to look at the cost as an average and marginal cost. Let’s first look at these activity centers. There are four of them: course design, course development, course delivery, and course evaluation.
Course Design: This starts with a survey to establish the need for having a course in the first place. In addition, one can study the reports already published on the subject. It gives information about the demand and supply gap. For an educational institute, it is about understanding the needs of the nation by each state or region and the people or communities (and their demands or requirements) to be addressed. Eventually, the course needs to be defined in terms of various aspects of consideration like title, objectives, target groups, entry criteria, availability of experts to develop learning resources in different digital and non-digital formats, modality of the programme development and delivery, possible sources of funding for the development of such a programme and the fees to be charged from the learners or students, etc. Getting these aspects of consideration in place (i.e. performing activities associated with the course design activity-center), need time and efforts of the faculty members which means incurring expenses whether paid as a salary to them or honorarium to the experts and other expenses like procuring research reports or conducting market surveys etc.
Course Development: This activity centre involved efforts and time spent on developing the components of the course like the programme handbook, student programme guide, course modules and units, credit hours for each, technology for digital content for distribution, student activities and practicum, student assessments and assignments, learning support system, etc. All these activities need time and cost allocation for developing the learning resources and environment. There are various course development models and also the mechanisms of media mix—supplementary, complementary, and integrated.
Course Delivery: Once the course is developed (certificate, diploma, or degree), it needs to be delivered. It involves many activities like advertising the course and marketing it over the social media channels, enrolling the students into batches, managing payments (recurring or one-time or referral discount or credits), giving them access to the content digitally or shipping printed materials, organising online and offline sessions at study centers, faculty and industry expert lectures and demonstrations, communications and reminders for study and assessments (including announcements and notification in bulk over mobile applications and SMS etc.), web-based support and counselling or mentoring sessions, call centre or chat or email or discussion board support for learners, assessments and grading and publishing scores and certifications. Finally, managing them as alumni. All these activities are pertaining to the delivery of the course and are the activities to be considered for costing purposes.
Course Evaluation: Once the programme is delivered or being delivered, there are quality monitoring activities to understand where the gaps are in terms of meeting the expectations of the stakeholders and the learning outcomes or objectives. These gaps or issues or suggestions, gathered through formal audit or informal feedback from the students and faculty members, are used to improve the course design in the same delivery or next iteration or cycles. If there are no major changes or revisions, the course is maintained. This includes keeping student and faculty records, credits for transfer or re-registration, counsellor records, and course records for future reference in case of questions or concerns. Whether there is minor, major, or no revision, these activities pertaining to the evaluation of the course incur additional costs and time and effort.
Note: The learning resources could be costed based on the stages in the learning process : pre-production cost, production cost, post-production cost, delivery cost and training cost.
Types of costs (Fixed versus Variable): Cost concepts can be borrowed from accounting and economics. Accounting that treats the cost as direct or indirect, capital or expense, etc., and economics that treats the cost as fixed or variable, average or marginal, etc. The costs that change with the rate of production or activities are represented as variable costs, while the costs that remain unchanged despite changes in the production rate are called fixed costs. For instance, building construction costs are fixed costs, while maintaining the facility is a variable cost. The cost of maintenance of a building is given in terms of, say, per square foot of usage (classrooms, laboratories, etc.). The cost elements (teaching or non-teaching) that do not change with the change in the number of students or teachers or subjects or courses taught are primarily the fixed costs. They are mostly one-time or non-recurring payments or investments, like in land, buildings, hostels, hospitals, transportation vehicles, etc. They are not impacted by the change in the scale of operations or production activities.
These cost elements are production enabling infrastructure costs. The variable cost depends upon the scale of operation, just as the number of books to be printed and distributed (and the cost associated with them) depends upon the number of students to be trained (the production process outcome in distance education). Variable costs are recurring costs and they change as the factors affecting the production (rate of outcome) change. In short, if the change in the volume of output implies a change in the input factor, the cost associated with the factor is a variable cost. In distance education, the variable costs are incurred mostly in the course delivery and evaluation activities, while fixed costs are largely incurred in the course design and development activity centres (since design and development outcomes are not dependent upon the outcome, i.e., the number of students to be enrolled). The course delivery and evaluation depend upon the process outcomes, i.e., the number of students to be trained and evaluated. The cost of the printed material or access to the digital content or appointment of teachers and counselors depending upon the student-teacher/counselor ratio are variable costs that vary with the number of students i.e. the production process outcome in case of distance education.
Types of costs (Average versus Marginal): If the cost of operation is divided by the production output, it will give us an average cost per unit of production. Similarly, if the overall or total cost is divided by the number of students enrolled, it will give us an average cost per student enrolled or graduated. The cost that is incurred for increasing the production unit by one is called the marginal cost or the incremental cost. It is the increase in the total cost as a result of the increase in the enrollment of one additional student. The way the average and marginal costs change or differ depends upon the proportion of the fixed and variable costs in the total cost.
For instance, if the
TC: Total Cost (TC, $) is 1000 and
FC: Fixed Cost (FC,$) is 400, which means
VC: Variable Cost (VC, $) is 600 and
there are 10 students enrolled in the course, then the
AC: Average Cost (AC,$) will be 1000/10=100,
AFC: Average Fixed Cost (AFC, $) will be 400/10=40, and
AVC: Average Variable Cost (AVC,$) will be 600/10=60.
If the 11th student gets enrolled and the Incremental or Marginal Cost (MC, $) incurred is 200, then the
TC = 1000 + 200 = 1200,
FC = 400 (remains fixed as earlier)
VC = 600 + 200 = 800 (as against as 600 earlier)
AC = TC/11 = 1200/11 = 109.09 (as against 100 earlier)
AFC = FC/11 = 36.36 (as against 40 earlier. AFC decreases as the number of outputs (students in this case) increases)
AVC = 72.72 (as against 60 earlier)
Cost Functions (Type 1):
Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC)
If N is the number of units of output (e.g., number of students, number of course) then
Average Cost (AC) = TC/N
Average Fixed Cost (AFC) = FC/N
Average Variable Cost (AVC) = VC/N
Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC)
Total Cost (TC) = Fixed Cost (FC) + AVC * N
Total Cost (TC) Per Unit = Average Cost (AC) = TC/N = FC/N + VC/N = FC/N + AVC
AC also called Marginal or Incremental Cost as it is a cost of each unit (inclusive of per unit FC and VC costs).
Cost Functions (Type 2):
Total Cost (TC) = a + bx + cy = a+ b1Xn + b2Xm +cy
TC = Total Cost
a = Fixed Cost (FC)
b = Average cost per course (includes courses to be initiated or upcoming and ongoing or existing courses)
c = Average cost per student
x = Number of courses
y = Number of students
Xn = number of new courses
b1 = Cost associated with the design and development of new or upcoming courses
Xm = number of existing course under maintenance
b2 = Cost associated with the maintenance of existing courses
Cost Functions (Type 3):
Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC)
TC = Total Cost
Fixed Cost (FC) = Fixed/Capital Cost of Production System (FCp) + Fixed/Capital Cost of Instructional system (FCi) + Fixed/Capital Cost of Evaluation System (FCe) + Fixed/Capital Cost of Administrative System (FCa)
Variable Cost (VC) = Variable/Operations Cost of Production System (VCp) + Variable/Operations Cost of Instructional system (VCi) + Variable/Operations Cost of Evaluation System (VCe) + Variable/Operations Cost of Administrative System (VCa)
Fixed cost varies based on the media and technologies involved/deployed. It remains same irrespective of the number of students for a given course. Variable cost varies or increases as the number of students for a given courses increases.
Semi-variable costs are those costs, which can change the fixed cost like number of trainers or tutors or counselors to be deployed based on the students : teachers ratio to be adhered to. It could also be in terms of training rooms required based on the given capacity of the training room. In short, these are fixed costs that varies (after regular intervals based on the range or limits or capacity or constraints associated with them).
Notes:
1. Process, Resource, Input and Output Considerations and Decision Trade-offs: The input or production costs, like paying for the teacher’s or instructor’s salary, are clearly laid out monetary outlays and can be computed and accounted for as a production expense, but the time spent by the student for learning and consumption of these services has a notion of forgone earnings attached to it (say if the student is a working professional and instead of spending time on earning, it chooses to spend the same time on learning and hence losing a formidable earning or monetary opportunity) and this cost of learning can only be imputed and may not be accounted for as such. But it is still worth imputing these trade-off costs as they matter (implicitly or explicitly) in the decision-making process (purchase and value consideration).
In rural areas, there is a higher drop out rate even with children as their parents will not like to send them to school to spend their time there as their presence on the field helps them gain more economic advantage and helps them sustain the living costs. As a result, even if there is no cost of education, for example, it will not be viable for them because there is no time available for the learning activity (the opportunity cost of time spent on learning is perceived very high by their parents when making the decision to enroll in education). Private costs are the costs associated with the consumer at the end of the day, both direct like on stationary or school fees and indirect like earning foregone earnings in employment or economic opportunity.
In short, just like a firm makes a trade-off (and incurs an opportunity cost) in terms of spending money to produce specific products and services (and not others) and incurs an opportunity cost, the consumer or buyer also makes a trade-off decision (and incurs an opportunity cost) in terms of spending money on your products and services (and not any other product or service, not necessarily of the same type or on competitive products or services). A firm chooses to produce a particular product or service because it thinks it can generate more benefit or return from it than investing the same amount in making some other product or service. Similarly, the consumer spends its money on your product or service only if it thinks it can get more benefit from your product than from some other or some other product (equivalent or otherwise).
2. Measurement of Educational Benefits: Although the costing of the educational products and services explained above using fixed and variable costs is borrowed from economics, these products are not seen by the consumer as an economic activity outcome governed by the forces of demand and supply in the educational markets. They are seen more as an outcome of social activity in society for consumption and self-development in relationships with others. Having said that, the consumer or buyer still compares the cost of one educational product (like a course, degree, or diploma) with others (wherever it is qualified to enroll) while making a decision. The decision of selling or enrolling in a course with an institution also involves the institute’s discretion, unlike other commercial products where anyone has the amount to be paid and could buy off the shelf. It is not biased against anyone except those seeking monetary value as a means of exchange or acceptance. The institute likes to weigh the decision with a sense of belonging to one particular student or customer instead of another. It is a social relationship of acceptance and a sense of belonging and not purely commercial as an economic activity as such. In short, both exercise their trade-offs in a purchase decision in terms of perceived costs and benefits of this exchange more as a social relationship than an economic relationship or sales contract. It is due to such inherent complexity of decision making, the real benefits and costs are hard to ascertain from an educational activity. This social underpinning being exercised (at either end) at the time of purchase (buyer’s perspective) or sale (seller’s perspective) distorts the economic rationale or perceived value of this transaction or event.
3. Sources of Cost: All the components of the activities incurring money or financial resources can be attributed to the sources of the cost of production. These components add to the cost of the education process or outcome. The costs need to be minimised in relation to their benefits (or the benefit-cost multiplier or factor must increase if the cost is incurred). In short, the benefit attributed to a component should grow proportionally at a larger rate than the increase in its component cost. Apart from various components used in the process of building and running an educational process to deliver the intended courses and outcomes that add to the cost of the education system or products (micro level), the educational institute should also consider the factors (macro level) that influence the cost of these components and hence the cost of their education system (production).
4. Costing Approaches – Cost Effectiveness and Cost Efficiency: There are several costing approaches used in cost analysis, but two are fundamental and essential: cost effectiveness and cost efficiency. These two approaches are valid for all processes, products, and products, even in the case of distance education.
Cost effectiveness : Cost effectiveness refers to the expenditure on resources or spending in line with the cost of production or output objectives. They are better measured in terms of the quality and quantity of the number of production units (against the set objectives). This measures how effectively the fund is being used for the required or targeted production and outcomes. The cost effectiveness studies include
(A) assessing the quality of the output and expressing it as the number of students passed out within a cohort; % of students secured distinction; first division, second division, simple pass; and so on.
(B) Another production outcome is the number of courses developed and delivered by the faculty members, the number of corporate events or workshops, or faculty development programmes conducted by the faculty members or institute.
(C) Another objective or outcome could be the number of placements or job offers made to the students (and the percentage of students offered jobs), or salaries offered (range, average).
(D) Another measure of cost effectiveness could be in terms of the usage of educational technology and automation to reduce the cost of production as well as increase the level of learning experiences (attitude, behavior, time management). An increase in spending on technology does not necessarily increase the quality of the learning experience. It depends upon how effectively the systems have been defined and developed. If multiple inputs or sources of cost are somehow collectively impacting the output or rate of production, then the impact of each needs to be studied as accurately as possible (multi-variate analysis).
Cost Efficiency: Cost efficiency refers to achieving the given outputs or objectives below the set budgeted cost limits for them or lower than the cost of an alternative strategy of implementation or production. For example, if you are developing a software product in-house and it costs you $1000 as opposed to the cost of getting it developed from a vendor, which costs you $2000, then the in-house production or development is more efficient than the alternative source of production (vendor development). In short, cost efficient means having a lower input or production cost and higher output value or units as compared to the next available alternative or strategy of production (yielding the same result or given objectives or outcomes). For instance, one could compare conventional classroom-based teaching based achievement of educational objectives with the cost of distance education based achievement of the same objectives to find out which one is more cost-efficient.
5. Being cost-effective without being cost-efficient is possible, but not the other way around: You are cost-effective if you are already cost-efficient, which means you are producing the intended or targeted results or outputs (might be consuming resources which are costlier alternatives though). In other words, in order to be cost-efficient, you must first ensure that you are cost-effective. UNESCO sponsored research which concluded that distance education is a more cost-efficient method than any of the traditional methods of education. Hence, distance education is more cost-effective (it meets the needs of the students and teachers to achieve the educational objectives or outcomes) and, in fact, it is more cost-efficient too when compared with the traditional methods of education. It is cost-effective as it can produce a large number of student enrolments, number of courses, longer duration of courses, and easy revision of courses using multiple media choices and media mix. It has low overhead costs, including for the faculty—full time or contractual.
6. Economies of Scale: “Economies of Scale” is about cost effectiveness. This is the state of a production system that is said to be achieved when the output, in terms of the number of units produced, increases to a point when the marginal cost (adding another output unit) starts declining. The greater the economies of scale, the more cost-effective the production system is. In short, if the system starts producing outputs with declining marginal costs (marginal costs become less than the average cost), the system tends to become cost effective owing to economies of scale. However, if the marginal cost starts increasing the average cost, the system becomes cost ineffective owing to diseconomies of scale. Distance education systems must realise the state of economies of scale. One should know what the minimum number of students that needs to be enrolled is to start reaping the advantages of operating at a scale and becoming more and more economical (marginal cost < average cost).
7. Classification of costs: By now, its clear that there are various classifications for the cost like fixed versus variable, average versus marginal, direct versus indirect, labor versus non-labor, recurrent versus one-time, variable versus semi-variable, public versus private, capital versus expenditure, capital versus operations, total versus unit and so on. Unit cost is most important or fundamental. It is cost per unit of production (per student graduated as an outcome). There are number of alternative costs possible – cost per student enrolled, cost per student attending or active, cost per student graduated, cost per student of certain group or course or cohort, cost by level of education attained (cost per education level), cost per class, cost per hour (example cost for broadcasting over a media channel or cost of online conferencing etc.), cost per course, capital cost per place, cost per teacher (recurring), cost per capita etc. The cost per student is widely used unit economics and the cost per student graduated and cost per student enrolled is the cost of repeat education (in the same course or class). The ratio of student graduated to student enrolled is internal efficiency of the education system.
Another classification of cost is current price versus the constant price. Current prices are based on the price of the resources being consumed or prevailing currently and when these are adjusted (using price indices) for comparison purpose with some base year price, then the adjusted price is the constant price.
