How Much Does It Cost

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How Much Does It Cost ?

Eileen G. McLoughlin, Assistant Vice President of Finance and Budgeting, Rensselaer Polytechnic Institute

Charles Tegen, Associate Vice President for Finance,

Clemson University

2014 Managerial Accounting and Decision SupportCharlotte, NC

November 13, 2014

Agenda

• Overview of cost accounting topics

• Review current methodologies and applications in higher education

– Common costing methodologies

– Assessing costs internally

– Program costing

– Service costing

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“I believe it is some sort of cost accounting presentation.”

Cost Accounting – What is it and Why?

• A means of analyzing a process to answer the question: What is the cost?

– Understand business model/structure: fixed vs. variable

• Methods of accumulating costs of activities – vary depending on the specific cost question

• Understanding cost is critical to making strategic decisions

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Cost Accounting – What is it and Why?

• Combination of financial and other relevant data or cost drivers to create costing models to support decisions.

• Financial accounting information supplemented by non‐financial data such as enrollment, credit hour production, faculty or staff full time equivalents, square feet, etc.

• Communication tool for decision makers

Consider….

Before we get too deep in cost accounting, think

– Select a methodology that works within your environment, for your purpose, to answer your or a decision maker cost questions

– Cost accounting is an art and a science

• Different methodologies will yield different answers

• Need to be confident in the method chosen and that the general ledger is the source

– Make sure the process will add value

• Is it helpful for decision makers?

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Applications in Higher Education

• Institutional costing

• Program budgeting or charges

• Support for decision makers

• Assessing costs to internal units

• Communication tool

Costing in Higher Education –Current Interest

• Literature on costing is plentiful but may be focused on the for‐profit sector

• Department of Education and other governmental agencies

• Higher education costing lacks uniformity and precision

– Responsibility center management practices

– NACUBO’s Cost of College does provide uniformity

– Delta Cost Project

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Costing in Higher Education‐Current Interest

• Functional classifications are seldom pure due to the multiple‐mission focus of higher education

• Principle focus has been on student/teacher ratios and contact hours

– i.e. student contact hours, teacher contact hours, head counts, and class size

• Higher education cost accounting has been dominated by the requirements of OMB Circular A‐21 and companion circulars.

Economic Challenges Intensifying Interest

• Funding

– Endowment performance or State funding

– Students ‐ affordability

• Public accountability and transparency movement

• Interest is more in cost and output

• Questions focused on value–added or ROI

• Understanding and managing costs

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Current Environment

• Cost of attendance – Can institutions be less costly?

• Cost of degree – Can institutions graduate more students with same budget by increasing retention?

• Program and delivery of programs are changing

• Return on Investment or Value add

• Pressure is for colleges to understand and speak simply to its costs

Indirect Cost Recovery Rate or Facilities & Administrative (F&A)

Recovery Rate

• Federally approved rate for recovering facilities and administrative costs supporting sponsored program activities

• Provides for a consistent methodology for capturing costs in supporting institutional costs

– Operation and maintenance

– Library

– Administration

– Depreciation

• Based on expenditures, space and headcount 12

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Indirect Cost Recovery Rate or Facilities & Administrative (F&A)

Recovery Rate

• Focused on research support

• Negotiated rate

– Will not provide for a 100% recovery

– Unallowable costs

• F&A rate = F&A expense/cost base and cost share

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NACUBO Cost of College

• Provides a uniform methodology for an institution to explain the cost to educate an undergraduate one year

• Explains the elements of costs

• Highlights the cost of educating a student versus the price charged per students

• Identifies undergraduate costs in four sections

– General institutional information

– Instructional and student services

– Institutional and community costs

– Undergraduate financial aid costs14

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Delta Cost Project

• Provides IPEDS database on spending

• Proposes the following metrics

– Average spending per student

– Average spending per degree conferred

– Estimates of costs associated with excess credits and with student attrition

– Cost, price and subsidy structures, and the proportion of average costs that are subsidized by student tuitions

– Marginal cost per student by program and level of instruction

• Why assess internal units

• Which costs to allocate

• Cost distribution methodologies

• Which units to distribute to

Assessing Costs Internally

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• Protect student investment, protect infrastructure

• Public policy: state tax dollars should not subsidize certain activities

• Distribute costs to units benefiting from services

• Make users of services accountable

• Decentralized environment

• Unrestricted sources assuming burden

Why Assess Costs Internally

• General and administrative costs

• Fringe benefits

• Telecommunications, information technology

• Facilities management: rent, utilities, maintenance

• Investment management

• Development activities: gift accounting, event planning, prospect research, major gift officers

• Implementation of systems, technology infrastructure

Which Costs to Allocate

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• What factors are driving the cost allocation?

– State or federal requirement

– True recovery of costs to central activities

– Full program costing

– RCM, Responsibility Center Management

• What activity base to use?

– Easy to calculate

– Easily understood and unbiased

– How much precision is required? Greater significance ‐ value

Considerations in Selecting an Allocation Methodology

• Directly related to services provided

– Telephone service requests

– Market rate rents

– Utility usage (individual metering)

• Pooled costs allocated over a specific base

– Full‐time equivalent (employee or student)

– Assignable square foot

– IP address

– Number of gift prospects invited to “gala” event

Cost Distribution Methodologies

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• Revenue tax– Percentage of tuition, gifts, investment income

– Not a direct allocation of costs ‐may not recover 100%

– Easy to apply

– Hard to avoid

• Negotiated cost allocation– Annual renegotiation

– Can be tedious, contentious, defensive

• Prospective recovery rate based on prior experience– Assessed to expense base

– Annual settlement of prior under or over‐recovery


Fringe benefit costs

– Accumulate into cost pools

– Determine what to include (consider F&A guidelines)

• Standard: FICA and Medicare; health, life, disability insurances; workers comp; retirement

• Other: end of career pay‐outs; education benefits

– How to distribute

• Equally to all employees

• Differential rates for faculty vs. staff

• Differential rates for sponsored programs vs. E&G

– Makes units conscious of full employment costs


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Fundraising costs

– Tax on gifts as raised

– Directly related effort to benefit

– Percentage from endowment earnings

– Keeps taxing past gifts; ignores non‐endowment gifts

– Fee for services

– Assess schools’ fees for prospects who attend galas and reunions; for prospect research; for gift accounting; etc.

– Annual giving

– Other?


• All costs to all units? Effectively responsibility center management

• To units which are not core to mission– Auxiliaries– Medical Center, hospitals

• Certain academic areas– Non credit/outreach programs

• Making auxiliaries whole can impact tuition discount/ financial aid cost

Which Units to Distribute Costs To

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Program Costing

Purpose

• Determine at the program (school, department) level the profitability of programs based on revenues generated less direct and indirect costs

• Basis for RCM, Responsibility Center Management

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Program/Department Productivity Data Requirements

• Student credit hours

– majors

• Average class size

• Number of sections

• Faculty FTE

• Research dollars generated

• Gifts received

• Endowment earned

Direct Data Requirements

• Total salaries by department

• Total instructional cost, non salary expenses

• Capital costs – department specific

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Indirect Cost Data Requirements

• Centralized costs

• Costs of non‐revenue generating departments/overhead

• Data to support allocation, drivers

– departmental square footage

– FTE

Tuition and Revenue Generation

• Determine total tuition generated

• Calculate total student credit hours and program percentage

– majors

• Allocate total tuition share by % of student credit hours in program (majors)

• Add additional program specific fees

• Accumulate research, gift and endowment income if applicable (by department, by PI)

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Direct Program Costs

• Calculate salary (direct) & benefit costs (allocated by FTE)

• Determine specific programs costs

– Instructional, non salary

– Capital specific to program

Indirect Program Costs

• Calculate total costs of all non‐revenue generating departments / programs (i.e. library, student services, business office, financial aid, etc.)

– Recommend separation of facility operations vs. specific other departments

• Central school or department costs

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Indirect Program Costs

• Calculate indirect non‐facility costs

– Total non‐facility costs x program credit hours % or chosen allocation methodology

• Calculate indirect facility costs

– Total facility costs x program square footage %

Summary Calculation

Total program revenue

(Direct program costs)

(Indirect program costs)

Net program profitability

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School of Science

Contribution Margin by Department

Fiscal Year XXXX

$(000s) 2525 2526 2530 2540 2545 2550 2560 2570 2580 2585 2590 2595

Total SoS Office

Masters

Program Biology Chemistry

Polymer

Synthesis

Center

Computer

Science

Earth &

Environment Math Physics

W.Milton

Ext. Pgm

Fresh

Water

Institute CIPCE

Direct RevenueUndergraduate Tuition 24,514 - - 3,113 3,021 - 6,574 1,065 6,593 4,148 - - - Graduate Tuition 2,818 - - 145 551 - 940 200 591 391 - - - Gross Tuition 27,332 - - 3,258 3,572 - 7,514 1,265 7,184 4,539 - - - Auxiliary Income - - - - - - - - - - - - - Financial Aid: Undergraduate (7,562) - - (935) (921) - (2,059) (339) (2,020) (1,288) - - -

Net Student Revenue 19,770 - - 2,323 2,651 - 5,455 926 5,164 3,251 - - -

Sponsored Research 7,846 157 - 553 2,482 22 608 741 1,062 1,793 - 428 - Other Sponsored Programs 4,769 1,973 - 50 149 2 343 134 1,431 573 - 89 25 Gitfs/Other Income - - - - - - - - - - - - -

Total Direct Revenue 32,385 2,130 - 2,926 5,282 24 6,406 1,801 7,657 5,617 - 517 25

Direct ExpenseDirect Instruction 13,755 1,394 4 1,355 2,814 - 2,455 624 2,450 2,591 72 (4) - Reserve Transfer - - - - - - - - - - - - - Auxiliary Expense - - - - - - - - - - - - - Sponsored Research 5,710 119 - 413 1,738 14 380 535 739 1,384 - 388 - Other Sponsored Programs 4,691 2,086 - 41 123 2 306 134 1,336 564 - 76 23 Restr Endowmt Admin Surchg (89) (65) - - (2) - - - - - - (22) - Oper & Maint - Direct 1,702 20 - 122 1,159 - 60 63 39 152 - 87 - Other Expense - - - - - - - - - - - - -

Total Direct Expense 25,769 3,554 4 1,931 5,832 16 3,201 1,356 4,564 4,691 72 525 23

Contribution Margin $ 6,616 (1,424) (4) 995 (550) 8 3,205 445 3,093 926 (72) (8) 2 Contribution Margin % 20.4% -66.9% #DIV/0! 34.0% -10.4% 33.3% 50.0% 24.7% 40.4% 16.5% #DIV/0! -1.5% 8.0%

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(000's)

Line Items Brief Description

DIRECT REVENUE

Undergraduate Tuition Revenues allocated based on credit hours taught & student enrollment, 80 / 20 split

Graduate Tuition Revenues allocated based on credit hours taught

Gross Tuition

Auxiliary Revenue Housing & Food, Field House, Health Svcs, the Union and Telecom BillingsFinancial Aid: Undergraduate Institute average discount % applied to undergraduate tuition, room, board, and student health &

activity fees

Financial Aid: Graduate

Net Student Revenue

Sponsored Research Research dollars recognized as spent, overhead included

Other Sponsored Programs Grants & gifts recognized as spent, overhead and surcharge included

Restricted Endowment IncomeDesignated Funds

Gift/Other Income Restricted expendable/LINAC & Incubator gross revenues

Volume Adjustment

Total Direct Revenue

DIRECT EXPENSE

Direct Instruction School operating budgets

Reserve Transfer

Auxiliary Expense Operating budget

Sponsored Research Direct research expenses (compensation, supplies, equipment & travel )

Other Sponsored Programs Direct grants and gift expenses (compensation, supplies, equipment & travel )

Restricted Endowment Surcharge 10% of endowment income earned

Designated Funds

Operations & Maint - Direct Utilities & debt service charged based on occupied square feet, utilities and depreciation rates

Deans Administration

Other Expense LINAC and Incubator operating budgets

Total Direct Expense

CONTRIBUTION MARGIN $CONTRIBUTION MARGIN %

RENSSELAER POLYTECHNIC INSTITUTE

TOTAL INSTITUTE

III. FrameworkINCENTIVE BASED BUDGETING

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(000's)

Line Items Brief Description

INDIRECT REVENUEUnrestricted Expend. Gifts The annual fundInvestment Income Endowment spending formula and cash managementEndowment Campaign Planning Temporary funding from the endowment to support the current CampaignEndowment SI Funding Temporary funding from the endowment for strategic investment, a 5yr Board approved program Other Misc. Income Parking revenue, patent income, physical education miscellaneous rentals

Total Indirect Revenue

INDIRECT EXPENSEProvost Operating budgets for the Provost's Office, research cost share, Graduate Admissions, computing,

and librariesPresident's Office Operating budgets for the President's Office and confidential payrollStudent Life Operating budgets for Undergraduate Admissions, Dean of Students, Registrar, and Bursar Finance Operating budgets for the Controller, Treasury, Internal Audit, and Budgeting & Financial PlanningHuman Resources Operating budgetAdministration Operating budgets for Environmental Services and Physical Plant, Campus Planning & Facilities

Design, Public Safety, Contracts and Grants, and PurchasingInstitute Advancement Operating budgets for Development, Marketing and Media, University EventsCapital Campaign Planning Funding from the endowment for Campaign expendituresGovernment Relations Operating budgetIntellectual Properties Operating budgetStrategic Investment Funding from the endowment for strategic investment expenditures

Subtotal Divisions

INSTITUTE WIDEIndirect Debt Service Debt service allocated to indirect units based on occupied square feet and depreciation ratesIndirect Utilities Utilities allocated to indirect units based on occupied square feet and utilities ratesOther Net benefits, research incentive, insurance and audit, banking and legal fees

Subtotal Institute Wide

Total Indirect Expenditures

RENSSELAER POLYTECHNIC INSTITUTE

TOTAL INSTITUTE

III. FrameworkINCENTIVE BASED BUDGETING

Service Costs

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Service Costs

• Services offered within your institution?

• Do these services align with strategic direction and mission of your institution?

• What is the total costs of offering the services?

• How should these services be funded?

– Budgetary allocations

– Charges

• Internal

• External

Information Technology Costs

• Define Technology

• Scope

– Computer center

– College or departments

• Communication

– Common terminology

• Review example

– Services

– Support costs

– Funding

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Example

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Direct Operational Costs A Allocated Costs

Service Category A People

Software (Licenses and

Maintenance)

Hardware (Equipment and

maintenance)

Training and

Operations A Infrastructure Management Capital Total

Direct Costs

Enterprise Systems and

Applications ‐ Internal A A

Enterprise Systems and

Applications ‐ External A A

Auxiliaries A A

Support & Innovation A A

Research A A

Indirect A A

Allocated Costs

Infrastructure A A

Management A A

Resources


• http://www.nacubo.org/Research/NACUBO_Research_Projects/College_Pricing_and_Financial_Aid/Cost_of_College_Study.html

Delta Project on Postsecondary Education Costs, Productivity, and Accountability ‐

• http://www.deltacostproject.org/

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Questions?

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Additional Materials

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Indirect Cost Recovery Rate or Facilities & Administrative (F&A) Recovery

Rate

Indirect Cost Recovery Rate or F&A Rate

Indirect cost recovery rules have a specific objective:

• develop an overhead rate for projects funded by sponsored contracts

• develop a rate to capture costs that are not specific or direct to a project but provide overall institutional support

– operation and maintenance

– library

– administration

– depreciation

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Indirect Cost Recovery Rate or F&A Rate

• Indirect cost recovery rate is expressed as a percentage of modified total direct costs allocated to sponsored program effort

– Research support focus

• Proposals are submitted to an institution’s federal cognizant agency

– Rate proposal is submitted, audited by the agency, and then negotiated is approved

• Goal is to reimburse an institution for the facilities and administrative costs incurred in supporting research contracts, never 100% reimbursement

Three primary types of data used:

• Financial – “current fund” expenditures by program

• Space – The net assignable square feet (NASF) and functional use of all space, owned or leased, occupied by any unit of the university

• Demographic – The number of students, faculty, and staff at the university

F&A Rate Data

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• Required – audited annual financial reports

• Expenses – all “current fund” expenditures by budget and object code for salaries and wages, benefits, supplies, rent paid centrally, utilities, security, insurance, interest, maintenance, professional services and programs

• Depreciation – amounts posted and reported for capital assets, such as buildings and equipment on the audited financial statements

F&A Rate Calculation

• Unallowables – expenditures posted to non‐research budgets that cannot be charged to the federal government through the F&A rate

• Cost sharing – dollar amounts required to be transferred from non‐research source budgets to grant or contract budgets

• Budget cost categories – cost pools assigned to all current fund budgets


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All allowable and allocableFacilities and Administrative Costsare allocated to Direct Cost functions

using a step‐down methodology specified in OMB Circular A‐21.


F&A expense

‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ = F&A cost rate

MTDC base ( + cost sharing)

Where:

F&A expenses = all allowable indirect costs allocated to organized research

MTDC base = all allowable direct cost expenditures classified as organized research

F&A cost rate = rate to be applied during a given period

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F&A Cost Example

Allocated to Research Calculated Capped *Cost Pool Description Research MTDC Base Rate Rate

Facilities Costs - Space Survey

Building Depreciation 14,500,000$ 250,000,000$ 5.80% Building Interest 5,000,000 250,000,000$ 2.00%Equipment Depreciation 10,000,000 250,000,000$ 4.00%Operations & Maintenance 50,000,000 250,000,000$ 20.00%Libraries 5,000,000 250,000,000$ 2.00%

Facilities totals 84,500,000$ 33.80% 33.80%

Administrative Costs

General Administration 30,000,000$ 400,000,000$ 7.50%Departmental Administration 75,000,000 400,000,000$ 18.75%Sponsored Projects Administration 9,000,000 400,000,000$ 2.25%

Administrative totals 114,000,000$ 28.50% 26.00%

Utility Allowance 1.30% 1.30%

Total Organized Research Rate 63.60% 61.10%

* A-21 limits the Administrative total to no more than 26%

RESEARCH F&A RATE

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NACUBO Cost of College Program Objectives

• Create a uniform methodology that any college or university could use to explain the cost of one year of undergraduate education

• Contribute a better public understanding of the kinds of expenditures made to deliver higher education

• Highlight the cost of education versus the price charged per student

NACUBO Cost of College Program

• Identifies undergraduate costs in four sections

– General institutional information

– Instructional and student services

– Institutional and community costs

– Undergraduate financial aid costs

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NACUBO Cost of College Program Methodology

• Relies on basic averaging techniques

• Concentrates on the cost of undergraduate education

• Simple to use and understand

• Standard template

NACUBOCost of College Program Observations

• Methodology works for its intended purpose ‐ but not precise

• Methodology more closely approximates the true costs for some better than others

• No value judgments should be made as to good or bad results for institutions

• Similarities and differences fit the known differences among institutions

• Cost nearly always exceeds price of education

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Delta Cost Project

• Provides IPEDS database on spending

• Proposes the following metrics

– Average spending per student

– Average spending per degree conferred

– Estimates of costs associated with excess credits and with student attrition

– Cost, price and subsidy structures, and the proportion of average costs that are subsidized by student tuitions

– Marginal cost per student by program and level of instruction

How Much Does It Cost

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