Cost analysis of education as an economic good helps in (i) estimating resource requirements (ii) allocating budget or funds (iii) monitoring resource usage and identifying waste (iv) using cost functions for decision making and (v) understanding inequalities in the cost of education across regions, gender, social class, ethnicity and income groups. Based on the purpose of decision making , there are different types of cost analysis methods or functions available to the evaluator:
1. Basic Cost Analysis: Basic cost is to know how much an educational initiatives or program could cost in total and what is the cost break-up by types of inputs or resources.
2. Cost-feasibility analysis: if it is necessary to understand whether the total cost is within the budget or budgetary constraints or not, such a basic cost analysis is called cost-feasibility analysis. In this the total cost is compared with source of financing the program.
Note: The computation of benefits is not needed in basic cost and cost feasibility analysis. The focus is on the inputs or cost or input resources (total as well as distribution of cost over resources or categories of resources).
3. Cost-effectiveness analysis: Effectiveness is defined as performance on a single criterion or variable. If the cost measurement is used to compare one option with another (different educational program or methods to achieve the same and/or singular objective) designed and implemented to meet the same objective (single criterion or outcome measure for relative cost comparison), then its called cost-effectiveness analysis. It tells about the internal efficiency of the resources invested in a program or option.
Cost-effectiveness first assesses whether the resources or inputs being used are able to deliver the required effect or impact or outcome or not. In this case, the effects or outputs or benefits are first identified in terms of the physical outcomes or units (not monetary terms or measures in different units) followed by the cost of input resources (monetary terms).
Then the cost of achieving these outcomes (set against a single objective) are then compared with other alternative options to ascertain how cost effective a particular chosen option is (as compared to others). It mostly used for comparison of options designed for implementation to achieve single objective or having similar outcome goals or objectives (not for options or programs designed to deliver multiple or different objectives or criteria). By executing an option that is most cost effective (delivers all the objectives or outcomes as needed at the least cost), one can ensure optimal usage of resources.
4. Benefit-Cost Analysis: If the cost is analyzed to ascertain the benefits or returns or economic profitability, then this becomes benefit-cost analysis. One needs to identify various resources or inputs to education then classify them and measure their costs in monetary terms, Same way, all the output measures our effects or benefits need to be translated in terms of the monetary value (present monetary value of the the outcomes or outputs or benefits) . Unlike, cost effectiveness which measures the outcomes in terms of non-monetary physical units and compares it with the input cost, benefit-cost measures both the the benefits or outputs (it could be multiple and different outcomes or outputs) and the costs or inputs and finds the multiplier (ratio of benefit to cost) to know which program or option is more economically profitable. Benefit-cost analysis is needed to identify the option that has more benefits to deliver and less costs to incur. All benefits and costs are translated in monetary terms.
5. Cost-Utility Analysis: It is done to ascertain the value of the program or option. In this case, the program could have different outcomes or utilities (monetary and non-monetary). The programs are evaluated by the stakeholders, based on the utility score or value or outcomes as perceived relevant by them. There can be multiple different utilities and benefits which are perceived as important differently by different stakeholders. Unlike in the case of cost-effectiveness, where single output criteria is used to compare the alternative options, it uses multiple criteria (monetary and/or non-monetary) or outcomes and assigns utility value to them based on how the stakeholders perceive them. It is hence more subjective than other methods of cost analysis. It answers the following cost for each stakeholder or decision maker – Which program or option has the highest utility at the lowest cost? It does not focus on the cost-effectiveness i.e. it could have higher utility value for some stakeholders but low or no utility value for others. It relates the utility value of the various outcomes or outputs of the program or option to the cost of inputs or resources used to produce the outputs.
Cost of Education is sum total of all input resources and total social cost of education is sum of both the public (or institutional) and private (or individual) costs. The private costs are of two types – direct and indirect. Direct is what gets paid for the education (fees, accommodation, travel etc.) and indirect are hidden or invisible costs like foregone earning or opportunity costs (or investments done by others like parents’ time invested alongside with the student or salary not earned or foregone as the individual time is diverted/assigned to learning and not earning during the course of education). Real costs consider the opportunity cost as well to compute the total cost.
Cost incurred by the institution (educational body, state, government, private or mixed) is called the institutional cost or public cost of education (financed by the governmental institutions like taxes, loans or other sources of public revenues). Public costs are also of two types – direct and indirect. The direct costs include recurring and non-recurring i.e. fixed (one time fund for setting up infrastructure) and variable (for operations or running the programs). Fixed costs do not vary with any input or output variable like number of enrolments. Recurring costs vary like with number of students (output variable) and number of teachers (input variable). Indirect public cost is lost opportunity to invest the same amount of fund for some other cause (and hence foregone earnings or taxes not collected from such foregone earnings). Total public cost is hence sum of of direct and indirect costs which includes both kinds of costs – fixed or non-recurring and variable or recurring costs.
Social cost is sum total of public or institutional and private or individual cost as explained above. Hence the social cost includes both the direct and indirect public and private costs. Indirect private or individual costs, includes after tax income (disposable income) foregone by the student while studying and indirect public or institutional costs, includes the taxes on the foregone earnings or before tax income foregone (next best alternative funding option). Putting them all together, the indirect social costs is the before tax income foregone (as it is sum of taxes foregone and income foregone after taxes). Example of direct private or individual costs includes fees for the program, direct public or institutional cost includes capital cost like building infrastructure and direct social cost means all direct resources at individual and institutional level or all direct cost factors of production leading to the set educational objective or outcome.
Determinants of the cost of education for both private and public costs includes (i) factors within the educational systems and (ii) factors outside the educational system, that impact the cost of education. Within the educational system could be like teacher’s salaries, student-teacher ratio, capital cost of education (building or classrooms, technology etc.,) as set and governed by the educational policy (as they could determined by the student demand for the course or number of enrolments, teachers available, cost of funds available etc.,). Outside the educational system, factors that can impact the cost of education include macro economic parameters like prices, demographics (demands and preferences), government revenue or fiscal position and political commitment to the education in the state or country.
Private cost of education gets influenced by five broad factors as determinants of private costs :
1. cost factors (like fees or foregone earnings),
2. economic factors (increased lifetime earning potential, disposable income and unemployment rate) ,
3. demand side factors (household characteristics like size, social groups or children, gender, educational level of parents, income of the household, occupation of the parents, geographic locations etc.,) ,
4. supply side factors (discussed at three levels – (4.1). public policy or macro level like shortage of space or location or infrastructure, (4.2) system level like incentives, penalties, school management and governance structures and methods including supervision and inspection, teacher accountabilities etc., and (4.3) at the institutional level are interpersonal relationships or operational efficiency that directly or indirectly impact the activities and their performance like between staff and students, team work, staff retention rate etc., and
5. non-economic factors include the social, cultural and political influences on the private demand for education and hence determine the cost of private education.
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.
