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## Lecture 4 Schoollevel Budgeting and Cost Analysis

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Title: Lecture 4 Schoollevel Budgeting and Cost Analysis

1
Lecture 4 School-level Budgeting and Cost
Analysis
• EDA 757/PPA 730/TL 955
• Fall 2002/Spring 2003

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
2
Lecture 4 Outline
• Cost definitions
• Cost accounting
• Cost analysis
• School-based budgeting

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
3
Cost Accounting--What Is It?
• Reorganizing financial data into costs rather
than expenditures or appropriations.
• Costs are defined as the resources consumed to
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.

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
4
Figure 7-1 Spending Definitions and the Flow of
Funds
Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
5
• 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.

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
6
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.

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
7
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,

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
8
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
• Goal is to eventually turn most indirect costs
into direct costs.

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
9
Example Heartland 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)
• Activity measure Enrollment by type

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
10
Direct vs. Indirect Costs Heartland School
District
• Look at detailed budget (Figure 7-2)
• Possible direct costs
• Instructional expenditures
• Operating maintenance expenditures
• Transportation
• Special student services.
• Probably indirect costs
• Director, support staff for transportation,
maintenance, special student services.
• Other undistributed expenditures.

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
11
Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
12
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.

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
13
Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
14
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.

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
15
Figure 7-4 Comparison of Cost Types
14
Fixed
12
Variable
10
Semi-variable
Step
8
Total Cost
6
4
2
0
0
1
2
3
4
5
6
7
8
9
Output
Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
16
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.

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
17
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.)

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
18
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.

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
19
Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
20
Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
21
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.

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
22
Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
23
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.

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
24
Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
25
Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
26
Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
27
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.

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
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Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
29
Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
30
Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
31
Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
32
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.

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
33
Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
34
Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
35
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).

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
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Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
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Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
38
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!

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
39
Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
40
Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
41
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.

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
42
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.

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
43
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!

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
44
Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
45
Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
46
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?

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
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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.

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
48
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.

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
49
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.

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
50
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.

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
51
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
available.

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
52
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

Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
53
Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides
54
Example for Rochester, NY
Thanks again to Bill Duncombe for the majority of
the content of this set of lecture slides