1. Cost Analysis Justin Marlowe
PUBPOL 522 – Public Financial Management and Budgeting
Autumn 2017

2. Learning Objectives
Define the cost objective and relevant range for the goods and services that public organizations deliver
Contrast fixed costs from variable costs; direct costs from indirect costs
Determine the full cost of a good or service
Calculate the break-even price and break-even quantity for a good or service; recommend management strategies “at the margin”
Contrast cost-based pricing with price-based costing
Allocate costs across departments, organizations, and jurisdictions
Analyze budget variances, both positive and negative

3. What Does this Cost? Some Key Terms and Concepts
“Cost Structure”
Cost Center – a unit within an organization that incurs costs and is assigned costs
Cost Objective – the unit of a good/service against which costs are measured
Direct Cost – a cost incurred only by and controlled by a cost center
Indirect Cost – a cost incurred by multiple cost centers; usually assigned by management to cost centers
The “Full Cost” of a good or service is its fixed costs plus its variable costs

4. What Does this Cost? Some Key Terms and Concepts
“Cost Behavior” – How costs change as the volume of service delivered changes
Fixed Cost – does not change as the volume of service changes
Variable Cost – changes directly in proportion to the volume of service
Step-Fixed Cost – fixed costs that “step up” or “step down” at different volume of service; sometimes called “lumpy” or “chunky” costs

5. An Example: Woodland Park Zoo
Seattle’s Woodland Park Zoo has the following admission prices:
April 1 through September 30
October 1 through March 31
Annual Pass
Adult
$19.95
$13.75
$49.95
Child
$12.25
$9.25
$17
Toddler
Free
n/a
Senior
$2 discount
“Flex Pass”
$67

6. An Example: Woodland Park Zoo
Let’s assume the Woodland Park Zoo has a “program” called “animal care and feeding”
What is this program’s cost structure?
How does admissions pricing reflect, or not reflect, this cost structure?

7. Differential Cost Analysis: An Example
Chapter 5, practice problem 5:
The housing director for the (fictional) City of Coho, WA is working on a new affordable housing project. The Fixed Costs are $300,000 for the project, and Variable Costs are $250 each time a family moves into an apartment at the facility. The cost structure of the project would be:
Volume
Fixed Cost
Variable Cost
Total Cost
Average Cost
100
$300,000
$25,000
$325,000
$3,250
500
$125,000
$425,000
$850
1500
$375,000
$675,000
$450
2500
$625,000
$925,000
$370
3000
$750,000
$1,050,000
$350

8. Differential Cost Analysis: An Example
The Coho project now has 2,500 move-ins per year. A new federal
government subsidy would pay $300 for each of 500 move-ins if the
project expand to 3,000 units.
The average cost per move-in at 2,500 per year is $370.
The average cost per move-in at 3,000 per year is $350.
The variable cost per move-in is $250.
What should Coho do?

9. Break-Even Quantity = a/(p-b) Break-Even Price = p = (a/x) + b
Differential Cost Analysis: Key Formulas
Profit = px – (a + bx)
Break-Even Quantity = a/(p-b)
Break-Even Price = p = (a/x) + b
Where: p = price; a = fixed costs; b = variable costs

10. Break-Even Quantity: An Example
Chapter 5, practice problem 4:
The Feed-A-Child Foundation wants to start a new program which will have $30 in variable costs per child and fixed costs of soliciting donations to fund the program of $10,000. If each donor were to give FAC $50, and each donor feeds one child, how many donors would FAC need to break even?

11. Break-Even Price: An Example
Chapter 5, Practice Problem 3:
The Pacific Northwest Ballet has $5,000 in fixed costs per performance, plus an additional $10 per attendee on ticket and program printing and other supplies. The normal auditorium can seat 300 people, and if more than 300 attend they must use the expansion seating area for an additional cost of $500. Suppose the program sets its break-even price based on expected ticket sales of 200 attendees per performance. What is their break-even price?