EDUCATIONAL FINANCE
COST CLASSIFICATION
INTRODUCTION
Countries world over, are not only searching for alternative ways of financing education, but are also paying closer attention to reducing unit costs by enhancing efficiency because of the increasing financial constraints facing educational investment. Since educational investment involves both social and private opportunity costs, government decisions need to take into account fiscal costs as well as the wider social costs. The great interest by the World Bank and UNESCO to develop methodological guidelines for the estimation and analysis of costs has increased interest in cost analysis and the need to clarify methods of defining and measuring education financial costs.
COST ESTIMATION IN EDUCATION
It can be argued from an economic analysis standpoint, that the real cost of education cannot be robustly estimated without an understanding of the concept of opportunity cost. The value of these foregone opportunities needs to be incorporated into data from public and private monetary expenditures on education for a good and robust estimate (Bowman, 1966; Tsang, 1988).
Although significant advances have been made in the conceptual understanding of education costs, reliable estimation of such costs is often complicated by unavailability of good cost data, especially in developing countries. For instance, while private costs are crucial in calculating the real cost of education, data on alternative use of school-going children?s time, say on family chores, business or on the farm are often not available. A robust determination of the cost of education in such circumstances becomes rather complicated.
Difficulties in determining educational costs
i) Budgetary data are often inadequate for a detailed study of costs because they only cover expenditures rather than real resource or opportunity costs.
ii) In most cases budgetary data only present the planned or provisional budget estimates rather than the actual expenditures.
iii) There is apparent confusion in distinguishing between recurrent and capital expenditure
iv) The treatment of capital expenditure varies considerably from one study to another.
v) There is lack of uniformity in the methodologies used in analyzing costs.
Determinants of educational costs
There are many factors that may determine or affect educational costs. Tsang (1988) has categorized these factors into two: (a) factors that determine the total amount of resources devoted to education and (b) factors that determine expenditures within education. Often, public expenditure represents a large portion of resources devoted to education.
Generally, the costs incurred in imparting or acquiring education are mainly determined by the factors like;
(a) Educational demand,
(b) Educational technologies,
(c) Teacher salary structures,
(d) Dropout and repeater rates,
(e) Utilization rates
(f) Market forces.
1. Educational demand
The increasing educational demand may be attributed to the following reasons: Education creates its own demand, powerful political pressure to meet the demand for education, high economic growth, and adoption of policies committed to availing opportunity to everyone, unprecedented growth in population and the increased recognition of education in playing a vital role in economic and social development.
2. Technologies in education
Education uses highly labor intensive technologies that have not changed much. Therefore clinging to old technologies and practices will inevitably continue to increase educational costs.
3. Teacher salary structures
A teaching force that comprises of many experienced and long-serving teachers attracts higher salary costs than that with more newly recruited and inexperienced teachers. Consequently, a teaching force that has a fair blend of the new and long serving teachers is more cost-effective.
4. Drop-out and repeater rates
Repeaters and dropouts increase the average number of years invested per completer/graduate. The increased number of years needed for an individual student or pupil to complete studies translates into high unit costs.
5. Utilization rates
The unit cost per student is substantially influenced by the rate of utilization of teachers, educational facilities and equipment. Conventional academic calendars and daily time schedules are enormous wasters of scarce educational resources, especially at the university level, where expensively built buildings and equipment often stand idle when ?regular? students are on recess or long vacation. Poor utilization of educational resources increases costs in education.
6. Market forces
The prices of educational inputs are generally affected by the interplay of forces in the market place. For example if teachers of science subjects are offered more remuneration in other sectors of the economy, the educational system will in response, have to substantially raise its pay package as well in order to retain them or encourage more students to train as teachers of science subjects. Once their numbers rise, the market forces set in to determine what they are eventually offered.
Classification of costs and definition of cost terminologies
The way in which costs are classified varies considerably. Though the World Bank and UNESCO have attempted to standardize definitions and ways of measuring costs, they have not standardized methods of classifying them (Eicher, Hawkridge, McAnany, Mariet, & Orivel, 1982; Hallak, 1969; UNESCO, 1977, 1980).
For instance, Hallak, (1969) argues that, because educational issues are complex and differ between countries, there is no standard terminology for the classification of educational costs. There is however some agreement on classification into distinct categories such as; economic cost and expenditure, direct costs and indirect costs, recurrent expenditures and capital expenditures, variable costs and fixed costs, unit costs and marginal costs, public costs and private costs, personnel costs and non-personnel costs, as well as instructional costs and non-instructional costs (Coombs & Hallak, 1972; Eicher et al., 1982; Vaizey & Chesswas, 1967).
It is also important to note that the costs of education transcend financial expenditures on education and also embrace the real cost/opportunity cost (sacrifices and earnings forgone). Figure 1 presents a classification of these costs in education.
Some of the terminologies that are commonly encountered in educational cost analysis include;
a) Opportunity cost
This cost component is very useful during the process of measuring the economic profitability of any investment. Otherwise, attempting to rely solely on financial expenditures to estimate educational costs is grossly inadequate and would demonstrate immense naivety. The term opportunity cost takes cognizance of the fact that each investment option involves a sacrifice of alternative opportunities to use resources. This sacrifice could be either for the present consumption or for some other form of investment. More specifically, the opportunity cost of a commodity/service is the value of the next best alternative sacrifice made, in order to obtain that commodity/service. Therefore, though there could many alternatives to give up in order to get what is desired, the opportunity cost of a decision is the value of the most desirable alternative to be given up so to get what is needed. For example, the opportunity cost of a KCSE graduate who decides to pursue university education, is the salary of the best employment he/she would have obtained. It is against this backdrop that stakeholders in the education sector should be cognizant of the fact that, educational investments use resources that have alternative uses. Some of these resources are namely;
a) Students? or pupils? time
b) Teachers? time
c) Finances
d) Equipment, Buildings and Land among others.
b) Recurrent cost(s)
As the term implies, this is a cost that recurs regularly and covers expenditures on goods and services that bring immediate and short-lived benefits. Thus expenditure on consumable goods such as; materials and teachers? salaries fall under recurrent expenditure. Consequently, the recurrent costs encompass what is incurred on personnel services and consumable supplies within one fiscal/financial year.
c) Capital cost(s)
These costs relate to more durable items e.g. Land, Buildings, and Equipment and so on. These costs render useful service over a period of years equipment as a capital cost in one year, it is prudent to calculate the annualized value of capital expenditure by calculating amortization and depreciation over their useful lifetime.
d) Social costs and private costs
a) Social Costs / Public Costs: These are those costs that are financed by the government, generally on the basis of taxes, loans, grants and other public revenue.
b) Private Costs: These are those costs that are borne by individual students and their families. Examples of private costs include; school fees, purchase of uniforms, text books, upkeep and other costs.
SOCIAL COSTS

PRIVATE COSTS

Direct

Indirect

Direct

Indirect

Teachers? salaries

Earnings foregone

Fees, minus average value of…