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Lecture 7 Schoollevel Budgeting and Cost Analysis


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Title: Lecture 7 Schoollevel Budgeting and Cost Analysis

Lecture 7 School-level Budgeting and Cost
  • EDA 757/PPA 730
  • Fall 2002

Lecture 7 Outline
  • Cost definitions
  • Cost accounting
  • Cost analysis
  • School-based budgeting

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
  • Involves determining what affects changes in
    costs and developing cost rates.

Figure 7-1 Spending Definitions and the Flow of
Steps in Traditional Cost Accounting
  • 1) Define the major missions and mission
  • 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.

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.

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.

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.

Example Heartland School District
  • Profile of district
  • Small district only 2 schools, less than 1300
  • 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

Direct vs. Indirect Costs Heartland School
  • 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
  • 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
  • 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.

Figure 7-4 Comparison of Cost Types
Total Cost
Possible Cost Definitions Heartland School
  • 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
  • Insurance, legal expenditures, debt service,
    misc. operating expend.

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
  • 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.)

Steps in Estimating Direct Personnel Costs in
  • 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

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Steps in Estimating Direct Personnel Costs in
  • 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
  • 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
  • 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

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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
  • 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

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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

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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.

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
  • 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
  • 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.

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
  • 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
  • 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
  • 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?

Deciding Whether to Contract Out Transportation
  • Key is determining what costs can be avoided by
    contracting out
  • District can avoid fuel cost, and material
  • Can you lay off all bus drivers and maintenance
  • Can district sell off equipment and not renew
    lease on bus?
  • Can district layoff transportation director and
  • 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.

Deciding Whether to Contract Out Transportation
  • Assume that the transportation director and staff
    are not eliminated, but all other costs are
  • 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.

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

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.

Key Steps in Developing SBB System
  • Determine which expenditure categories should be
    controlled at school level (including personnel
  • 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

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

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Example for Rochester, NY
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