Program level cost accounting – what’s working?



I find a number of my clients are working on some sort of cost accounting process for various programs.  What they are discovering is that there are precious few processes in place anywhere that address this need.  So with many of those that I either work with or talk to engaged in projects of this kind, I thought the topic might be a good installment for this blog.  Here is an outline of what we will explore.

  1. Revenues – apportioning student net tuition
  2. The contribution margin approach
  3. Allocating indirect costs
  4. Creating a virtual department of general education
  5. Standard costing of faculty compensation costs
  6. Course numbers for release time

No, I won’t have a full process in place at the end of this but it could help you structure the process and engage in conversation with other parties to see if you can pull this off.

Some of this may seem technical but I believe most practitioners will get the picture.

  1. Student net tuition

I’d like to think that a departmental / program analysis begins with revenue.  The challenge is that student revenue per course is far from a constant.  While the tuition charge is pretty easy to derive, students benefit from an infinite number of discount combinations in the form of unfunded, institutional financial aid.

So, as a first step, someone who is savvy in your administrative system needs to create a net tuition amount per hour for each particular student.  That is, institutional aid is subtracted from the gross tuition billed to come up with net tuition.  That amount is then divided by the number of credit hours the student is taking.  This yields net tuition per hour. Since these amounts are on the student bill, I have to think they can be gleaned.

The next step is to take the student course schedule and multiply the net tuition per hour by the hours for each course. When this has been performed for all students, the net tuition per course can be derived.

Structured properly, this data can be rolled up into tuition discount percentage for academic departments and majors.  It seems prudent to create such a metric in a report that can be run as soon as the census count is made about two weeks into each semester.

Add specific course fees for each course to make the revenue side complete. This is step one.

2. The contribution margin approach

It is important for these kinds of analyses to pass muster with those affected by them.  One can expect that those associated with a lowly populated major might apply a good deal of scrutiny on this process.  This is why I recommend a three step process, with the first step comprised of identifying the net tuition revenue on a per student basis (a. above).

Step two is to identify the direct costs of a department and divide those costs by the hours of credit being taught by the department.  Direct costs are those that are directly associated with the department and are dominated by faculty salaries and benefits.  They also include conference costs, administrative assistance, supplies, discipline specific equipment, computers and other items.  Each one of these costs are assigned to the department on specific budget lines.

At this stage, one takes step one’s revenues and subtracts the direct costs for each course being taught.  The result becomes a contribution margin for the course.  To the glee of nearly everyone, the number derived is almost always positive.  Some, however, are much more positive than others.

3.  Allocating indirect costs

I like to allocate other costs in general categories.  Begin with facilities.  First identify the costs associated with academic buildings.  Then, divide that amount by the number of course credit hours being taught on campus.  This is not student credit hours but the hours of courses.  As an example, presume that an institution has four buildings that are used for academic purposes (and I would include the library) and that there are twenty classrooms in total.  The institution teaches 200 courses of the three-hour variety each semester.  Presuming that it costs $100,000 to operate those buildings, the facility cost for each course is $500.

Courses that require some institution-provided transportation can have those costs divided by the number of courses using such services.  This can be the second line in the indirect section.  Then, there is everything else.  Again, I would use the credit hours being taught as the denominator.

The net of all of this represents the surplus (deficit) from offering courses to students.  It can then be offset by marginal contributions from auxiliaries and donations  (inserting an added step, if you will).  Those add-backs could be placed after the net number to show how much they contribute. Again, they should be broken down by the number of credit hours being taught.

4.  The virtual department of general education

Every institution of which I am aware makes their students major in at least two things – the major the student chooses and the one chosen by the institution.  The latter is called general education, among other names.

The challenge when aggregating contributions from various departments is that certain ones might have robust general education courses and somewhat weaker upper level classes.  Imagine a faculty member who teaches a 100 student intro course for three credit hours while averaging six students for each of his three other classes.  This leads to an average class size of 29.5.  Pretty impressive.

What if, however, general education courses were offered with their own department prefix?  This would leave a faculty member teaching three classes within their department and averaging six students per class while the general education department benefits from the 100 student class. Most students do not choose an institution because of the specific general education courses being offered.  Instead, their selection is based on an overall feeling of the campus environment, coupled with a compelling program.

For those classes that can be used for major credit or general education, I suggest a cross listing arrangement so that majors can be identified and general education participants segregated out.  My clients have been quite creative in finding ways to designate departments.  A conversation with IT can be beneficial.

If general education courses are broken out, how do we assign faculty costs to that or other departments?  Enter some manufacturing-style cost accounting.

5.  Allocating faculty compensation costs

Assign all full-time (contract) faculty compensation to one department (academic administration).  This allows for an easier budgeting process.   Every year, calculate how much the total salary and benefits are for each rank of faculty member.  Then, average this by faculty FTE in each rank.  The result is the average standard cost of a faculty member at a particular rank.  Divide this by the number of hours in a typical teaching load and you have faculty cost per hour of load, by rank.

A contra account is also established in the academic administration series.  This account is credited for faculty cost per hour of teaching, while the specific department where the course is taught is debited.  A cross-listed course is divided by the number of departments to come up with the cost for each department represented in the course.  (The course “Statistics” is an example of this.)  The contra account and the department designation should use the same account (with different departments) so that a roll-up of all accounts cancels these entries out.  Those who have worked in manufacturing know what I am suggesting here.

The actual process of applying faculty costs to the departments where they are teaching occurs in mid semester when the final faculty loads are known.  It usually takes about 90 minutes per semester to complete; a worthwhile process that also saves time when the budget is prepared.

One may ask about non-teaching loads.  After all, getting the courses that a faculty member is teaching is not all that difficult; it comes from the course database. What about non-assigned or release time?

6.  Assigning course numbers for non-teaching loads

Wouldn’t it be great to have a report off the system that reconciles with the faculty contract?  That is, if the faculty member is supposed to have 24 hours of load, the system always provides the breakdown of that load in terms of course taught and non-teaching time?

The approach I took was to create course numbers for all non-teaching time.  These numbers were concentrated at the highest values (9xx) so that they did not disturb the normal course reporting mechanisms.  This allowed the institution to capture all non-teaching time and to identify just how much load was being diverted to non-teaching activity.  It also reconciled a faculty member’s load to their teaching schedule, even if some of the load was administrative or otherwise assigned.

With such an approach, assigning the departments of a faculty member can be complete.  A report can be run with each faculty member and the number of hours they are assigned.  It should be compared with the contract to ensure that all time has been accounted for.  You will learn a good deal about how much non-teaching time costs you too. Brace yourself.

Conclusion

While this doesn’t give you the entire process needed for a full-blown cost accounting system, It could provide a structure that allows for the gathering of information and a change in processes.  Keep in mind also that some programs will be minor contributors but are an integral part of your mission.  The numbers alone will not justify eliminating this or adding that.  But, the absence of numbers don’t do that either.

Now, get to work.


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