Cost Analysis 101 Prepared by Frederic Glantz November 13, 2009 Kokopelli Associates LLC© xxx001

Key Concepts Expenditures vs. Costs Line Items vs. Functions Overhead Cost Total Cost Unit Cost Marginal Cost Kokopelli Associates LLC©

Expenditures vs. Costs Expenditures = Actual Outlays (Cash or Credit) Costs = Market Value of All Resources Used Costs may or may not equal expenditures. You need to be clear about what is being measured. Kokopelli Associates LLC©

Line Items vs. Functions Line Items = Things Wages & Salaries Fringe Benefits Supplies & Materials Rent Utilities Etc. Functions = Services Provided or Things Produced Mental Health Services Child Care Nutrition Education Kokopelli Associates LLC©

Annual Statement of Income & Expense Gives expenditures by line item What is the appropriate level of aggregation? Total Labor Wages and Salaries Fringe Benefits Supplies & Materials … Utilities Contract Services Occupancy Etc. Kokopelli Associates LLC©

Functional Cost Analysis Requires a Time Study Professional estimates (informed guesses) Time Logs (aka Time Ladders) Random Moment Sampling Time logs are the most commonly used form of time study Kokopelli Associates LLC©

Sample Time Log Work Day: 6:30AM – 6:00PM = 690 minutes Child Care Education Assessments Social Services Administration Breaks   6:00 6:15 6:30 6:45 7:00 7:15 7:30 7:45 8:00 . , 5:00 5:15 5:30 60 minutes 540 minutes 30 minutes 60 minutes Work Day: 6:30AM – 6:00PM = 690 minutes Kokopelli Associates LLC©

Organizational Structure The organizational effects how/where costs are measured. Costs incurred at higher levels within an organization need to be accounted for. Stand Alone Organization Unit of a Larger Organization Unit of a Division of a Larger Organization Kokopelli Associates LLC©

Stand Alone Organization Child Care Center Kokopelli Associates LLC©

Unit of a Larger Organization Social Service Agency Child Health Clinic Child Care Center Mental Health Services Kokopelli Associates LLC©

Unit of a Division of Larger Organization Social Service Agency Child Health Clinic Child Care Services Mental Health Services Family Child Care Sponsor Child Care Center Kokopelli Associates LLC©

What to Measure In a strict sense, costs at each organizational level include a share of the costs incurred at each higher level above it in the organizational structure Key question: Are the costs incurred at higher organizational levels material (i.e., meaningful)? Yes Need to measure Treat as overhead costs No Can be ignored You must be able to make a strong case that these costs are not material Kokopelli Associates LLC©

Overhead Costs Overhead or indirect costs are costs that benefit the entity being analyzed, but… It is too difficult (or impossible) to measure the costs that are directly attributable to the entity being analyzed, or It is too expensive to measure the costs that are directly attributable to the entity being analyzed Allocate overhead costs in proportion to some meaningful and easy to measure variable (e.g., labor hours) Kokopelli Associates LLC©

Overhead Costs (continued) In addition, overhead costs include: administrative and other costs that are not direct service provision (e.g., breaks) Kokopelli Associates LLC©

Measures of Cost Use the measure that is most appropriate for the research question that you are trying to answer Total Cost = Directs Service Cost + Overhead Cost Average Cost = Total Cost ÷ Total Units of Service Marginal Cost = Change in Total Cost ÷ Change in Total Units of Service Kokopelli Associates LLC©

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