Module+2


 * Module 2 - The Techniques of Cost Analysis**

This module began with an introduction to the elements of cost analysis. As a learning exercise, we explored the costs involved in a distance education course. We "painfully" learned how to create a budget, classify resources, differentiate between cost categories, classify the costs as fixed or variable, and worked with various cost equations. There were 11 sections to this module - are very valuable in learning the cost analysis process and applying them to the Mock Assignment and Assignment #2.

1. __Modeling costs__ - In creating a budget we differentiated between two terms/approaches - the **ingredients approach** and **modeling costs.** When using the ingredients Prof. Huelsmann compared our budget to a meal. For example, if one is making lasagna, you need to consider all the ingredients that are required to make lasagna - noodles, sauce, cheese, seasonings, beef, sausage, etc. The same is for the design of a course - what ingredients will be needed? You'll need faculty, assistants, tutors, course materials, course design, equipment, supplies, etc. Just as you get a receipt for your purchases, you can approximate what your ingredients will cost you for the course - what is the salary of the professor? how much does it take to design the course? what fees are being charged by the tutor? how much does it cost to ship the materials? how much do you charge the student?, etc. However, when we are not able to accurately know in advance how much money we should set aside for our costs and resources, we use the modeling approach. When we use the modeling approach we create mathematical equations to help guide our costing efforts by categorizing and classifying costs.

2. __Costing distance education__ - Rumble had a great illustration which shows "a systems view of distance education" (1997, p. 6), which includes materials, students, logistical, and regulatory.

3. __Classifying costs__ - Rumble (1997) classifies costs into four categories: human resources (staff), premises and accommodation (land and buildings), equipment and furniture (bought or rented), and stock, supplies, consumables and expenses (p. 13-18). All of these costs can be either fixed or variable, and also classified as capital or operating. Helpful definitions for me during this model included:


 * Fixed Cost || "Costs that do not increase or decrease with changes in the level of activity" (Rumble, 1997, p. 23) ||
 * Variable Cost || "Costs that go up or down with each increase or decrease in the number of cost units of the cost driver involved" (Rumble, 1997, p. 29) ||
 * Capital Cost || "A non-recurrent expense, that once bought, has a useful life of more than one year" (Rumble, 1997, p. 11) ||
 * Operating Cost || "Expenditure that will provide a benefit only during the current accounting period" (Rumble, 1997, p. 12) ||
 * Cost Unit || "The cost of one measure of output" (Rumble, 1997, p. 22) ||
 * Cost Driver || "Anything that, following a change in its volume, causes the overall cost to change" (Rumble, 1997, p. 27) ||

4. __Capital costs__ - a quick reading and Excel exercise was helpful in differentiating between capital and operating costs. For example:
 * A building is a capital cost
 * The salary of a principle is a revenue expenditure and a recurrent cost
 * The fee for an external consultant is an operating cost
 * The fee for the server is a non-recurrent cost

5. __Depreciating capital costs__ - Capital costs are expenses that have a life of more than one year. For that reason, the cost items can be allocated and charged over several years to spread out the expense of the item. We can use simple depreciation, social discount, or annualization to spread these costs over a set period of time. Another Excel exercise showed us how easy it is to calculate an expense over several years by factoring in the Initial Value, Number of Years, Depreciation Value, and Written Down Value.

6. __Analyzing capital costs__ - Annualization goes one step further than depreciation, it also includes in its calculation - foregone interest - money which could have been earning interest. The annualization formula is: A (R, N) = __R (1 + R) N__ (1 + R) N - 1 Where: R = interest rate N = number of years

7. __Total costs__ - All you need to know when calculating the total costs! Total Costs = Fixed Costs + Variable Costs TC = F + VxN Where: N = number of students

8. __Average costs__ - And here is the equation for calculating the average costs! Average Costs Per Student = Total Costs / Number of Students AC = TC / N
 * However** - if the number of students increases, the average cost decreases while other things don't - good to know in distance education! Especially when we think about some institutions - economies of scale!

9. __Marginal costs__ - "The cost of adding just one unit of output" (Rumble, 1997, p. 24), stated another way, the marginal cost is an increase in the total cost as a result of producing one extra unit. For example, it costs $100 to produce 10 units, and it costs $105 to produce 11 units. The average cost to produce 10 units is $10, but the marginal cost of the 11th unit is $5.

10. __Semi-variable costs__ - Can be summarized as a combination of fixed and variable costs. These costs can start out as fixed, but can easily become variable after a certain level is exceeded. For example, course tutor Allison is paid $2,500 for her OMDE606 class - a fixed cost. However, she is eligible to receive overtime if she puts in additional hours above that stipulated in her contract - the variable cost.

11. __Perraton's costing cube__ - Finally, we explored the costing cube - simply follow the arrows to reduce the cost per student, or click here for additional information ([]).

In summary, an excellent and informative module. It was fun to play with the numbers in the various exercises and watch the costs increase and decrease. Also, it gave a thorough understanding of some of the many possibilities that one needs to consider when creating a distance education budget - how costs can go up and down depending on the development costs or the number of students. Also - to keep costs down, we might want to look at various options for multi-media and technology. What works the best in each situation? It's not always just use the latest and greatest technology - what is the most effective and efficient.

Rumble, G. (1997). //The costs and economics of open and distance learning.// London : Kogan Page.
 * References**