1. Cost Analysis 101 Prepared by Frederic Glantz November 13, 2009
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2. Key Concepts Expenditures vs. Costs Line Items vs. Functions
Overhead Cost
Total Cost
Unit Cost
Marginal Cost
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3. 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.
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4. 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
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5. 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.
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6. 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
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7. 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
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8. 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
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9. Stand Alone Organization
Child Care Center
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10. Unit of a Larger Organization
Social Service Agency
Child Health
Clinic
Child Care Center
Mental Health Services
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11. 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
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12. 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
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13. 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)
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14. Overhead Costs (continued)
In addition, overhead costs include:
administrative and other costs that are not direct service provision (e.g., breaks)
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15. 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
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