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EME 301 Educational Costs and Finanacial Analysis IBADAN EXTERNAL STUDIES PROGRAMME SERIES EME301 EDUCATIONAL COSTS AND FINANCIAL ANALYSIS by BABALOLAJ.B DEPARTMENT OF EDUCATIONAL MANAGEMENT UNIVERSITY OF IBADAN IBADAN. PUBLISHED BY THE FACULTY OF EDUCATION UNIVERSITY OF IBADAN IBADAN. Centre for Ex...

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EME 301

Educational Costs and Finanacial Analysis

IBADAN EXTERNAL STUDIES PROGRAMME SERIES

EME301

EDUCATIONAL COSTS AND FINANCIAL ANALYSIS

by BABALOLAJ.B DEPARTMENT OF EDUCATIONAL MANAGEMENT UNIVERSITY OF IBADAN IBADAN.

PUBLISHED BY THE FACULTY OF EDUCATION UNIVERSITY OF IBADAN IBADAN.

Centre for External-Studies Faculty of Education University of Ibadan Ibadan. All right reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying recording, or otherwise, without the prior permission of the copyright owner.

First published 1995 ISBN 978 -021-100-4 Typeset at: Farmcoe, Ibadan.

Printed by: Agora Publicity Company, Ibadan

CONTENTS Vice Chancellor's Message Foreword

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General Introduction ....

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25

Lecture One:

Meaning of Educational Cost

Lecture Two:

Classification of Educational Costs…

Lecture Three:

Total and Unit cost of Education

Lecture Four:

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Current and Constant Prices/Private, Institutional and Social Costs

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Lecture Five:

Historical and Standard Costing in Education ….

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Lecture Six:

Marginal Costing in Education ......

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Lecture Seven:

Factors Influencing Costs of Education ........ 58

Lecture Eight:

Methods of Financing Education

Lecture Nine:

Funding of Compulsory and Voluntary Education Programmes

Lecture Ten: Lecture Eleven;

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Private Financing of Education

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Sharing of the Financial Burden of Education among Various Actors ....

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Lecture Twelve:

Sources of Educational Funds ......

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Lecture Thirteen:

Budgetary Analysis ...... ........ .......

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114

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Lecture Fourteen: Budgetary Analysis and Determinants of Educational Revenue Lecture Fifteen:

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Financial Allocation in Education

Answers to Pre-Test and Post-Test Questions

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Vice-Chancellor's Message I wish to congratulate you most heartily on having been deemed eligible as one of those making history at this University. Exactly 40 years after its inception, the University has embarked on the External Degree Programme with you as a pioneer. It is our wish that the excellence for which our University is internationally recognised will also feature in the External Degree Programme. The implication of this is that you will have to work hard as pioneers to make it so. You have an excellent opportunity ahead of you for self-improvement. It is no easy task to combine full-time work with part-time studies but your determination to achieve laurels for your family and to help elevate the standard of the teaching profession should be your bulwark against all odds. Because you are on your own, you need to discipline yourself and keep pace with the schedule worked out for you by your Lecturers. Prompt reading of your notes, submission of written exercises and strict adherence to study schedules should be your daily motto. DO NOT BE A DROP-OUT. A Chinese proverb says "The longest journey begins with the first step". As you begin, I wish you a successful journey.

Professor A. B. O. O Oyediran Vice-Chancellor. 2nd January, 1992

Foreword When the University of Ibadan External Studies Programme Unit organised a workshop for course writers early this year, it was pointed out that the programme would rely mostly on the medium of print in carrying out the educational dialogues with its clientele at a distance. It was also noted that the type of course text envisaged would he the self-contained one which would incorporate the learning message in a package. That then marked the beginning of the development of what is now known as our External Studies Series. Planned as independent materials, the series have had the input of not only the course writers but also the editor, graphic and reprographic artists and other members of the production team. The various writers have attempted to develop their course content in different disciplines, thus shedding light on the overriding concepts and principles in their subject areas. They have also attempted to link the wide variety of the experiences of the clientele with the lectures presented. In doing this, elements of dialogue, sometimes interspersed with good humour have been adopted. Again, feedback issues have not been left unattended to with the use of questions aimed at promoting discovery learning. A look at the choice of themes, the arrangement of units and the orderly sequencing of topics in each lecture shows that the course developers arc guided by the need to pace teaching-learning situations in such a way as to reduce fatigue, boredom and other problems of stress for the programme's clientele. The writers have been guided by those andragogical principles of learning which put the adult learners' characteristics first. We do hope that the learners would make abundant use of this opportunity of a relaxed atmosphere which their course texts have provided. Some of the course materials have been graphically illustrated while others have benefitted immensely from illustrations in prose form. The nature of the courses written and the slant of the topics treated have been the determining factors in this regard. Perhaps as the courses arc further developed and the programme itself benefits from the feedback received from its clientele, our range of illustrations would take a new dimension.

It should however be mentioned that in spite of our adherence to the use of self-contained materials, we have created room for further reading of reference texts to promote the development of an all-round body of knowledge for our clientele, This is a reflection of the flexibility usually built- into any adult learning process. It is also our own way of achieving a lot in learning at a distance. We must at this point appreciate the efforts of the individual course writers and the members of the course production team in ensuring that these series are ready on time. It is hoped that the same spirit would be engendered when our clientele finally settle down to serious studies. We hope that they would then send in their questions and comments on the texts, and let the andragogical position we have both taken be fully reflected in their formative evaluation of these on-going dialogues through the medium of the print.

Dr. Mobolaji Ogunsanya Director

General Introduction There are broad areas of study in this course. The first deals with the analysis of educational costs while the second is concerned with financial analysis in education. The two are interrelated. In most cases, they are both considered as educational cost analysis. This book contains fifteen lectures. Lecture one is made up of the definition of basic cost concepts in education. In this lecture, you will be introduced to several ways of measuring costs of education. You will be made to differentiate between opportunity cost and money expenditure. Lecture two is an extension of lecture one. In it, you will be made to differentiate between explicit and implicit costs, as well as among sunk, incremental and marginal costs of education. Lecture three classifies total costs of education in three different ways. First, as the addition of direct and indirect costs, Second, as the combination of variable and fixed costs and third, as the addition of current and capital costs, it ends with the definition of unit costs of education. The fourth lecture compares and contrasts the terms "current" and "constant'" prices, using practical examples to make you understand the basic assumptions underlying their usage. It ends with a concise explanation of private, institutional and social costs of education. Having known the various cost concepts, you will need to know the technique-and steps for measuring and analyzing educational costs. The three main types of costing are discussed in lectures five and six. Lecture seven contains a highlight of various internal and external factors which may lead to variation in both capital and current costs of education. This brings us to the end of one side of the equation. The eight lectures open the discussions on the financial aspect of educational costing. Lectures eight to ten are on the methods of financing education. Two basic methods are discussed. That is, centrally versus locally and publicly versus privately financed education system. You will be exposed to such issues as reasons for a predominant public funding of education, financing of compulsory education programme, selective financial policies and rationale for private financing.

In lecture eight you will be introduced to the five major actors, who are usually involved in financing education. You will be made to understand the various levels of involvement of the ministry of education, other ministries, local communities, households and external donors. Lecture twelve contains information on sources of educational funds at various levels. That is, where government, institutions of learning and individuals obtain funds for the purpose of education. For instance, at the macro level, sources of educational funds include public, household, voluntary or private funds and those from economic enterprises. At the institutional level, the four principal ways are through public, private and internally generated funds and also by deficit financing or borrowing. Lectures thirteen and fourteen are on budgetary analysis. In these lectures, you will read about analyses of recurrent expenditure, CapitaLand revenue budget. Lastly, lecture fifteen contains a comprehensive discussion on financial allocation for education. You will be made to understand the two main criteria for sharing the national cake among various sectors and within the education sector. Thus, the last lecture delves into both equity and efficiency criteria for financial allocation in education.

It is my belief that by the time you finish reading through the fifteen lectures in this course, you will thank God for a time well spent. I will advise you to read each lecture thoroughly as if you will be called upon to teach it. The pre-tests are to be attempted before reading the lectures that follow. After reading, you are then expected to try your hands on the post-tests. You will, by doing so, know the value added to your education through your exposure to this course. This can be done by comparing pre-and post-tests scores in each lecture.

LECTURE ONE

Meaning of Educational Cost Introduction What is educational cost? Educational cost is a measure of what a student, an institution of learning, or the public has to give up in order to educate an individual or a group of people. Cost of education may he incurred by producers (educational institutions) or consumers (students and their parents). When a community offers a piece of land to an institution of learning for building a school, the cost to the community, the owner of the land, is represented by the consumption foregone, while the institution of learning incurs a precise and measurable money cost. The community in question is a seller and the- institution is a buyer. The seller gives up the enjoyment attached to the land and the buyer gives up his money in return. You, as an individual, can also count your costs. That is, what you have given up or what you are currently sacrificing or what you are likely to pay in the future on your education. Presently, you have committed your money, time and energy to your education. If you are to be successful as an external degree student, you must excuse yourself from attending naming studies. Thus, you are expected to give up some enjoyments in order to succeed in completing the course. Therefore, cost of education is a measure of what is given up in order to be educated. There are several ways of measuring it. Some of the important ways will be discussed in this lecture. Objectives At the end of this lecture, you should be able to define educational cost in relation to both opportunity cost and educational outlays. You are also expected to differentiate between capital and current educational expenditure.

Pre-Test (1)

A measure of what a student, an institution of learning, or the public has to give up in the process of education is best described as (a) Educational outlays (b) Educational expenditure (c) Educational cost (d) Price of education

(2)

The income foregone by students in order to be educated is an example of (a) Educational outlays (b) Opportunity cost of education (c) Operational cost of education (d) Educational expenditure

(3)

Educational expenditure is best defined as the, (a) Amount of money that is indirectly spent on educational inputs in the process of educating people (b) Amount of money that is directly spent on educational inputs in the process of educating people (c) Measure of what has to be foregone in order to be educated (d) Physical inputs expended in the process of educating some people

Course Contort Two Broad Ways of Expressing Educational Costs Educational cost may be expressed in money or non-monetary terms. Each time you hear about it, your mind may go to the prices paid on education. You may be thinking that such things as fees and levies are being talked about.

While it can be measured in terms of the prices paid on the educational inputs, the cost may also be expressed in terms of the value the educational inputs would have in their most profitable alternative use.

(a) Opportunity or Sacrifice Cost of Education Opportunity cost of education represents the value of the real sacrifice that have to be made in the process of education. I will like to refer to what Coombs and Hallak said in one of their books on "Cost Analysis in Education". They stated: "You get a day off and would dearly like to go fishing, but your conscience says that you should stay home instead... You face a tough choice here because whichever way you decide will involve a significant sacrifice cost". Your time is limited and you only have a day to yourself. If you eventually choose to stay at home, the sacrifice cost is the opportunity to catch some fishes. Extending this illustration to education. A country has some amount of money to spend on either education or health. The money is enough to cover both programmes. Whichever programme is chosen will involve a significant sacrifice cost. If the government eventually chooses to spend its money on education, the sacrifice cost is the opportunity attached to good health. The case is like that of somebody who is seriously sick and the herbalist prescribes that a goat should be killed, as sacrifice in order to save the life of the man. Implied in a sacrifice, is the painful decision of taking one out of competing needs, just because we cannot take both at the same time. You cannot eat an egg and still expect a chicken from the same egg. You either eat it and forego the opportunity of having a chicken or forego the enjoyment attached to egg eating in order to have a chicken. Opportunity cost is different from direct production expenditure. It does not warrant actual expenditure on education. According to Hallak (1969), it represents the real charges resulting from the operation of education systems, which do not occasion actual expenditure. For example, school buildings could be let for other purposes and the real cost would include the rent which would be earned if different alternative was adopted.

External aid is another example. There is an opportunity cost for education, since resources assigned as external aid to education could go to other purposes

Such as transport, roads, hospitals, etc. income foregone by pupils and student is another example. The school population, if employed on national production, would earn an income. The loss of income due to the withdrawal from working life of an individual or a group of pupils is referred to as earning foregone or opportunities cost or sacrifice cost of that particular education. (b) Money Cost (Outlay of Expenditure) This is the amount of money that is directly spent on educational inputs, in the process of producing educated people. It is otherwise referred to as expenditures and may not reflect the true cost because p/ the official budgetary accounts are found of either overstating or understanding the real costs of education. Although, the concept of opportunity cost is recommended for cost studies, the difficulty of actually estimating the next best alternative has tended to force cost analysts to resort to money cost as a substitute for it. There are two broad divisions of money cost in education. These are namely: (i) capital and (ii) current expenditures. The main difference between the two is in the length of time during which the commodities that are produced or purchased are being used. For instance, expenditures on buildings and equipments which can be used for a very long period of time are classified as capital, while those on goods and services that bring short-lived benefits, usually for not more than a financial year, are referred to as current or recurrent. They are to be renewed annually. In some cases, they are referred to as operational costs, since these expenditures are necessary to keep the operation going. Capital expenditures are necessary to start the operation, whether or not there is production. It represents the prices paid on durable educational goods such as land, buildings, equipments, machines, etc, while current expenditures are the prices paid on those educational inputs which are meant for operational uses such as labour (teaching and nonteaching personnel) and materials (stationery, chalk, etc).

Consider a person who is just starting to live independently in a rented apartment and has nothing to start with. Obviously, he will need to incur some capital expenditure, even before packing into the new apartment. He will buy some durable items such as bed, chairs, tables, stove, utensils, plates and spoons. Whether or not he sleeps at home, those durable items will be kept in the house.

On the other hand, he will need to spend additional money on some current or operational items such as gas, kerosine, soap, food stuff, etc. Whenever he is not at home, he may decide not to have any of the operational items. Even some-of these items can be carried along to his next destination. The current items are meant for operational purposes. Furthermore, they must be refilled constantly, as soon as they are about to finish. 1 want you to think about this: whenever you prepare your food, there will be a need to u...