Lecture 4 Schoollevel Budgeting and Cost Analysis

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Lecture 4School-level Budgeting and Cost
Analysis

• EDA 757/PPA 730/TL 955
• Fall 2002/Spring 2003

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Lecture 4 Outline

• Cost definitions
• Cost accounting
• Cost analysis
• School-based budgeting

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Cost Accounting--What Is It?

• Reorganizing financial data into costs rather
  than expenditures or appropriations.
• Costs are defined as the resources consumed to
  produce your service (e.g., depreciation as
  measure of capital cost)
• Goal is to determine how much it costs to produce
  the major services or products (produce unit
  costs).
• Involves determining what affects changes in
  costs and developing cost rates.

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Figure 7-1 Spending Definitions and the Flow of
Funds
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Steps in Traditional Cost Accounting

• 1) Define the major missions and mission
  centers.
• 2) Identify the major activities/outputs of each
  mission center.
• 3) Identify direct vs. indirect costs.
• 4) Identify variable vs. fixed costs.
• 5) Calculate rates for direct costs. How do
  costs vary with output.
• 6) Allocate indirect costs to mission centers.
• 7) Calculate unit costs for each mission center.

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Define Mission Centers Outputs/Outcomes

• What are the mission centers for your agency?
• Mission centers (which are not necessarily
  organization units) should be organized around
  the major services provided public.
• What are the major activities (outputs) and
  outcomes of each mission center?
• Service centers should reflect the major internal
  services provided to support the direct services
  provided the public.

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Examples for School Districts

• Mission centers
• Could be organized by school.
• Could be organized by major programs (regular
  education, special education, dropout prevention
  program, etc.)
• Activities/outcomes
• Activities Number of students served, number of
  courses offered.
• Outcomes Dropout rate, percent passing certain
  exams, percent of student going to college, etc.
• Service centers
• Transportation, maintenance,
• Data processing, printing,
• Financial services, personnel, purchasing.

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Cost Definitions--Direct vs. Indirect

• Direct costs are costs that can be related
  directly to the mission center. Typically
  include personnel, materials, supplies,
  facilities, etc. used by center.
• Indirect costs are costs that cannot presently
  be tied directly to mission center. May include
  many costs of service centers, and central
  administration of the agency.
• Goal is to eventually turn most indirect costs
  into direct costs.

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ExampleHeartland School District

• Profile of district
• Small district only 2 schools, less than 1300
  students
• Enrollment has been declining for last decade.
• Moderate levels of poverty, special needs.
• Mission centers Two schools
• Jane Doe Elementary School (K6)
• John Smith Academy (7-12)
• Activity measure Enrollment by type

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Direct vs. Indirect CostsHeartland School
District

• Look at detailed budget (Figure 7-2)
• Possible direct costs
• Instructional expenditures
• Operating maintenance expenditures
• Transportation
• Special student services.
• Probably indirect costs
• Central administration
• Director, support staff for transportation,
  maintenance, special student services.
• Other undistributed expenditures.

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Allocation of Indirect Costs

• Need to assign all indirect costs to mission
  centers (e.g., schools).
• Traditional cost analysis has used several
  different methods for indirect cost assignment
  (allocation factors, step down method, job order
  costing)
• Ultimately, most methods make assumptions about
  allocation factors. (See Figure 7-3 for examples
  of allocation factors.
• Determine what operational information you have
  for each mission center (e.g., enrollment by
  type, teachers, floor space, direct personnel).
  These can be used as allocation factors.
• Calculate of total for each allocation factor
  by mission center.
• Assign each indirect cost an allocation factor.
• Multiply total indirect cost by category by the
  appropriate allocation percent for each mission
  center. You have now assigned indirect costs to
  each mission center.
• Key goal of Activity Based Costing is to improve
  the accuracy of the indirect cost assignment.

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Cost Definitions--Fixed vs. Variable

• Key aspect of cost analysis is to determine how
  costs vary with output (activities) provided.
  See Figure 7-4.
• Variable costs vary directly with output. Can
  develop a cost rate per unit (e.g., cost per
  student).
• Step costs vary in lumps with unit of output.
  Best example is fulltime personnel, which can
  provide a range of service (e.g., teachers).
  Need to determine productivity rate (output per
  person), and cost per step (annual salaries).
• Semi-variable costs some costs have a fixed and
  variable component (e.g., utility charges or
  lease agreements). Need to determine fixed
  charge and charge per unit.
• Fixed costs do not vary at all with output. In
  the long-run very few costs are fixed.

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Figure 7-4 Comparison of Cost Types
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Fixed
12
Variable
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Semi-variable
Step
8
Total Cost
6
4
2
0
0
1
2
3
4
5
6
7
8
9
Output
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Possible Cost Definitions Heartland School
District

• Variable costs
• Materials supplies
• Substitute teachers
• Some types of equipment (e.g., desks, books)
• Transportation (per student taking bus)
• Step costs
• Fulltime personnel
• Instructional equipment and facilities
• Semi-variable costs
• Equipment leases.
• Fixed Costs
• Central administration, other central office
  staff
• Insurance, legal expenditures, debt service,
  misc. operating expend.

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Parameters and Assumptions

• If a budget on a spreadsheet is going to be
  flexible, the calculations should be based on
  cell references, not hard numbers.
• The only hard numbers in the budget should be in
  parameter sheets. These sheets highlight what
  factors drive the budget, and changes to the
  budget involve simply changing parameters.
• Any assumptions made in developing the budget
  (e.g., no staff turnover), should be listed as
  well.
• Figures 7-6, 8, 9, 11, 13 are all parameter
  sheets for calculating the personnel budget.
  (You should look carefully at the lecture 7.xls
  to see how these work.)

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Steps in Estimating Direct Personnel Costs in
Schools

• Develop enrollment forecast for both schools.
  Figure 7-5 is based on cohort method discussed in
  Lecture 6.
• Estimate the required teachers in each grade.
• Teachers are usually fulltime, and are examples
  of step costs.
• Step costs are usually defined by a productivity
  rate (maximum output a person can provide). For
  teachers, the productivity rate is the class size
  (students/teacher).While states may define a
  maximum class size, there usually is a range of
  acceptable class sizes if the district sets it
  target less than the maximum set by the state.
  For example, assume Heartland school district has
  set its target class size by grade less than the
  state average (Figure 7-6).
• In this case, teachers are what might be called a
  soft step cost because there is some
  flexibility around the target class size. To
  capture this flexibility, it is possible to
  include an acceptable range around the target (as
  long as it is below the maximum). See Figure
  7-6.

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Thanks again to Bill Duncombe for the majority of
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Steps in Estimating Direct Personnel Costs in
Schools

• To calculate the number of personnel by grade
• Divide enrollment by grade by the target class
  size, and round up. See Figure 7-7 (rows labeled
  with class size target).
• Divide the enrollment by grade by the maximum
  class size, and round up. See Figure 7-7 (rows
  labeled with class size maximum).
• To calculate staffing within target
• Divide enrollment by teachers in row with class
  size target to get actual class size with this
  number of teachers.
• Divide enrollment by teachers in row with class
  size maximum to get actual class size with this
  number of teachers.
• If the class size in a) is less than acceptable
  lower bound, but not greater than the acceptable
  upper bound, then use staffing in b). Otherwise
  use staffing in a).
• See row within variation in Figure 7-7.

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Steps in Estimating Direct Personnel Costs in
Schools

• Given the staffing levels selected, you need to
  determine the education and experience level of
  the staff. While it would be preferable to
  automate this part of the process, there are to
  many factors that could vary (new education
  level, and turnover, in particular). Instead, it
  probably makes sense to put the staff chart as a
  parameter sheet, where the numbers can be
  changed directly. Figure 7-8 is another example
  of a parameter sheet. Also included on this
  sheet are factors to calculate the FTE and cost
  of substitute teachers, and other teacher
  compensation (extra assignments).
• Multiply these staffing levels by the teacher
  salary schedule (Figure 7-9) to get teacher
  salary budget (Figure 7-10). Figure 7-9 could be
  viewed as another parameter sheet.

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Steps in Estimating Direct Personnel Costs in
Schools

• 9. Set up a parameter sheet with experience level
  for the other staff for both schools. You can
  fill this in based on last years staffing
  schedule, and any turnover, layoffs, or
  additional staff this year. See Figure 7-11.
• 10. Multiply these staffing schedule by the staff
  salaries in Figure 7-9 to calculate salary budget
  for other staff (Figure 7-12).
• Set up parameter sheet with the factors used to
  determine fringe benefits (Figure 7-13).
• Calculate the fringe benefits for all school
  staff, and add to salaries to get the full
  personnel budget for each school, and the school
  district (Figure 7-14).
• This budget has been set up to be flexible. If
  you change any of the numbers on the parameter
  sheets, the personnel budget sheet will change
  automatically.

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Steps for Estimating Other Direct Costs

• Collect information on other expenditures from
  past budgets at the school level (Figure 7-15)
• Use this information, as well as information on
  leases and contract rates, to estimate cost rates
  (Figure 7-16). This is another parameter sheet.
• For variable costs, calculate cost per student.
  For instructional materials supplies (Jane Doe
  ES) divide 35,910 by 630 57/student.
• For cost related to teachers, calculate cost per
  teacher. For AV equipment, divide 16,625 by 35
  teachers 475 per teacher (Jane Doe ES)
• For leases (contracts) determine rate/student (or
  teacher) For example, Heartland SD contracts
  with a regional service center for classes for
  limited English proficiency and special needs
  students. Also computers are leased at a rate of
  1,000 per computer.

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Steps for Estimating In-House Service Center
Costs by School (Transportation)

• Collect operating information on bus service
  (Figure 7-17)
• Students riding bus to school, average length of
  trip,
• students/bus, bus miles per driver per day, fuel
  efficiency of bus.
• Calculate cost rates (Figure 7-17)
• Bus lease, fuel price, maintenance cost/mile ,
  equipment cost/bus,
• salaries.
• For administration costs (director, staff), and
  for direct bus related costs allocate across
  schools. (Buses are not assigned to one school.)
• Allocation factor Percent of total students
  taking bus to school in each school.
• Calculate the total transportation cost (Figure
  7-18).

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Calculate Total Per Pupil Costs by School
(School-level Budget)

• Calculate the direct costs for each school using
  the personnel budget, and cost rates developed
  previously. Determine the total direct cost and
  direct cost per student (Figure 7-19).
• Calculate the indirect costs for each school,
  making assumptions about allocation factors. Use
  the allocation factors identified earlier (Figure
  7-3). Calculate total indirect cost for each
  school, and overall cost for each school (and per
  student cost). See Figure 7-19 (cont.).
• This is an example of a flexible school level
  budget!

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Cost AnalysisWhat is it and Why Do It?

• Cost analysis is the use of cost accounting data
  to improve decision making.
• Cost analysis can be used for
• Can be used to build flexible budgets.
• Can be used to identify what services to provide
  in-house vs. contract out.
• Can be used to reform management practices to
  improve efficiency -- Important component of
  performance management reforms.

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Building Flexible Budgets

• The key to building flexible budgets is to
  carefully define costs, and link costs to
  activities (students), or staff (teachers).
• Figure 7-19 is a flexible school-level budget.
  If one of the parameter changes, the budget
  changes automatically.
• For example, assume that a charter school has
  been added to the district, and that enrollment
  in K6 is expected to drop by 15 in each grade.
  We could calculate what would happen to the
  budget
• Change the enrollment by grade in Figure 7-6
• Look at the new staffing levels. The new
  calculated staff for Jane Doe ES is 29, a
  reduction of 5 teachers compared to original
  estimate.
• Manually remove 5 teachers from the staffing
  schedule in Figure 7-8. I have assumed that the
  least experience, and least educated staff are
  laid off first.
• Make a change in the non-teacher staff. I will
  assume that one asst. principal, social worker,
  secretary, and custodial are laid off. Again I
  assume layoffs are by seniority.

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Example of Using Flexible Budget (Effect of
Charter School)

• Figure 7-20 shows the new school-level budget
  with the lower enrollment levels due to charter
  school.
• While direct costs have gone down in total, the
  per pupil levels have not changed much because
  most direct cost categories adjust with
  enrollment and staffing changes.
• Indirect costs have not gone down at all
  (assuming for simplicity they are all fixed).
  Per pupil indirect costs have increase by 8
  (1426/1316), because they are spread over fewer
  students.
• Total costs have dropped by 6.4
  (9,096,980/9,714,487), while total enrollment
  dropped by 7.5. Per pupil costs have gone up
  1.5. Costs will not drop as fast as enrollment
  due to fixed costs!

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Deciding Whether to Contract Out Service

• Presently Heartland SD provides its own bus
  transportation. Another alternative is to
  contract the whole service with a private bus
  company.
• On average, it costs 1,954 per student taking
  bus (enrollment of 1,216).
• The XYZ bus company has offered to provide the
  service for 1,700 per student. Should the
  district contract this service?

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Deciding Whether to Contract Out Transportation

• Key is determining what costs can be avoided by
  contracting out
• District can avoid fuel cost, and material
  supplies.
• Can you lay off all bus drivers and maintenance
  staff?
• Can district sell off equipment and not renew
  lease on bus?
• Can district layoff transportation director and
  staff?
• Contracting out does not usually mean eliminating
  all costs. Probably will need to have
  transportation director, and possible clerical
  staff to monitor contract, and arrange for
  transportation services.

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Deciding Whether to Contract Out Transportation

• Assume that the transportation director and staff
  are not eliminated, but all other costs are
  eliminated.
• Costs for lease
• 1,700/student x 472 students 802,400
• Costs for director and staff 121,030
• Total cost with new lease 923,430.
• Cost provided in-house 922,148
• No cost savings to contracting out.

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School-Based Management and School-Based Budgeting

• One of the management reforms of the last decade
  has been school-based management (SBM). In
  addition, school-based budgeting (SBB) has been
  attempted by several large city districts.
• They can be linked together, but not necessarily.
• The rise of school accountability systems implies
  providing more authority to the school to manage
  operation, including allocate budget.
• School districts have traditionally provided very
  limited budgetary authority to building
  principals.

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Key Issues in SBM and SBB

• Who should authority be decentralized to
• Principal
• Teachers
• Community/parents
• What should be decentralized
• Planning
• Curriculum
• Non-personnel budget
• Personnel decisions
• In reality very few SBM reforms have resulted in
  full SBB system.

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Key Steps in Developing SBB System

• Determine which expenditure categories should be
  controlled at school level (including personnel
  decisions).
• Develop cost accounting system to determine what
  costs are at school level.
• Use results of cost analysis to develop
  allocation factors between schools.
• Implement system, and readjust cost allocation
  factors as more information on costs becomes
  available.

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Example Edmonton, Alberta

• Edmonton has been using school-based budgeting
  system for 25 years. 80 of budget is controlled
  by schools.
• Money is distributed to schools using pupil
  weights as allocation factors
• Regular (K8) 1.0
• High school 1.03
• LEP students 1.24
• Mild disabilities 1.26
• Moderate disabilities 1.95 to 2.17
• Severe special needs 3.71 to 5.18
• See following school budget for Edmonton. See
  the website for more details http//www.epsb.edmo
  nton.ab.ca/budget/index.shtml

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Example for Rochester, NY
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