Budgeting a distance education program

Show me the Money!  As a distance education administrator you will hear that often.  In many major institutions, distance education is part of the continuing education unit and typically this outreach arm of an institution is often considered a “cash cow”.  This was the case with my previous institution.  Most distance education programs, even when supported by the institution, are looking to become self-sufficient.

Moore and Kearsley (1996) briefly discuss budgeting distance education programs.  Administrators must decide how much money to spend on the unit’s different areas of function such as course development, technology, academic staff, student support services, central facilities, administration and marketing/promotion.  Budget decisions must be made at many different levels: institutional, departmental, programmatic, and in individual courses.  Each level of decision-making will have different priorities.  Consequently, budget decisions are often accompanied by power struggles as each group attempts to fund their piece of the pie.  It is important to make well-informed budget decisions.  This requires extensive planning.

Planning and designing a budget

Every organization has unique needs and funding sources when it comes to developing its budget.  For most distance education programs the budget is developed and driven on the income from enrollments.

The leading authority in the costs and economics of distance education is Greville Rumble from the British Open University and he has published a book on this.  It goes into great detail that we will not be able to discuss in this one week but I will be providing you models and definitions from his book, as well as some other models.

I found a benefit-cost project on the web. This project conducted by Frank Jewett received a grant in 1996 and the following summarizes key points from a national discussion related to the issues in determining costs of distance education courses.

• The discussions of benefits should be separated from the discussion costs initially.  The benefits and costs of distance education should be compared with the benefits and costs of classroom instruction.
• Costs should be calculated from the perspective of the educational institution.
• Costs of both mediated and classroom instruction should be based upon a comprehensive list of institutional costs directly related to the specific instructional mode.

In order to determine if a distance education project is successful, it needs to be compared to classroom instruction costs.  I know that initial development of distance education can be very costly so returns need to be reviewed over time.  In Jewett’s report he attached a chart at then end of web site to show where lecture and distance education costs intersect.  Since you can no longer see the chart I will tell you about it.  The chart was designed to show the cross over in the costs of serving students in the classroom and serving students at a distance.  The cost for developing a distance course start out higher than for the classroom.  However, at a point the costs will stabilize for distance education and continue at that rate no matter how many students are added to the course.  For the traditional classroom the costs will continue to rise with increases in enrollment.  You will always need to pay for a teacher for a certain number of students.  This is where the concept that DE will pay for itself or even make money comes into play.  However, you must realize that this is for a large program. 

Bates (1995) has created the ACTIONS model for assessing costs and benefits.  The acronym stands for:

Access,

Costs,

Teaching functions,

Interaction and user-friendliness,

Organization,

Novelty and

Speed

Bourdeau and Bates lists the following key cost areas:

Fixed and Variable Costs

Production and Delivery Costs

Equipment and Teaching Materials

Variables Impacting on Costs

Costs and Decision-making

In essence, taking all these factors into play, it is important to understand costs in terms of providing access by using appropriate technology.  Technology can be costly and become obsolete in a short period.  The ACTIONS model points out it is important to distinguish between fixed and variable costs in determining which technology to use.  The table below describes fixed production costs for one hour of teaching material.

Table 1    

Fixed Production Costs (including overheads) for One Hour of Teaching Material

(Bourdeau and Bates, 1995, pg.277)

 (although I find some of these a little exaggerated, it does help make the point)

In conventional education, the cost of each course tends to be roughly the same each year. However, technology costs tend to show more variation and can be broken down into production and distribution costs. There are several ways to express costs.  Each has its value, depending on the purpose.  A number of assumptions may effect which costs and benefits are collected.

1. Total costs over the whole life of a course or project for different numbers of learners taking that course.

2. The marginal cost of increasing the volume of teaching by one unit.

3. The marginal cost of adding an additional student to a course.

4. The average cost per hour of study material for a particular technology.

5. The average cost per student study hour.

While the costs of specific items vary greatly between institutions, the cost structures (the relationship between volume of teaching, numbers of students, and the costs of production and distribution) tend to be constant.  We can reflect this using cost curves that show how costs vary along these dimensions.  Costs per student study hour (the average cost per hour of study contact with the technology for every student taking the course) is the measure that best takes into account both volume of activity and number of students and provides the best comparison between costs of different technologies. 

Rumble provided an activity for costing to help you think through how to budget a course or program.

Activity of Costing

Phase 1: Preparation

1.      Identify the scope of the study

·        Obtain a broad understanding of the project and its scope.

·        What kinds of costs are involved?

·        What is driving the costs?

2.      Decide on the basic format of the analysis

·        Decide in great detail exactly what it is that is being costed or measured.

·        Rough out the approach that is being taken.

Phase 2: Execution

1.      Collection of data and information

·        Collect the data and information on inputs, their costs and the outputs.

·        Understand the limitation of the data.

·        It is much better to record the data in ways that will enable it to be aggregated later.

2.      Analysis

·        Be clear as to the purpose of the costing exercise, and decide how this will affect the analysis.

·        How accurate are the findings?

Phase 3: Delivery

1.      Presentation

·        What are the aims of the study?  What questions were being asked?

·        Does the accuracy of the information need to be qualified?

·        Is there an explanation of the methodology used, and its limitations?

·        What are the findings?  How reliable are they?

2.      Evaluation

·        How successful was the study?

(Rumble, 1997, pgs. 75-77)

Rumble also provides good definitions for all the budgeting terms you may run into if you are reviewing a distance education budget.

Definitions

Cost – is the actual or notional expenditure of money incurred on, or attributable to, a specific thing or activity.  Notional  - estimate  actual after service, what it did cost.

Cost unit – is a measured amount of product or service used for the expression of the costs of that product or service – important that the cost unit reflects a measured amount of a product.

A unit cost – the cost of one measure of output

Cost center – locations, functions or items of equipment or human resources

Total cost is sum of all the costs attributed to the cost unit or cost center under consideration.

Direct costs

·        Direct materials are the raw materials or components that become part of the finished goods, or are used in the delivery of or supplied with and can be attributed to a particular product or service.  This includes material wasted during the manufacturing process, as well as the costs of packaging etc.

·        Direct labor is the cost of work done by people where that work can be attributed to a particular product or service.

·        Direct expenses are items such as subcontracted work or special tools or equipment associated with a particular product or service.

Indirect costs – costs that cannot be directly attributed to one product.

Overhead - any cost other than a direct cost identified with producing a service or product.

Fixed costs – do not increase or decrease with changes in the level of activity

Semi-variable costs with relevant range - stay the same within a certain range then go up or down accordingly

Variable costs – every time one unit of output is added, the cost goes up by the cost of that unit.

Marginal costs – the cost of adding just one unit of output.

Committed costs – those which cannot be eliminated or cut back without major effect on the enterprise’s objectives or profits.

Managed costs – these are costs which can be reduced fairly easily without any immediate major disruption to the objectives or profits of the organization.

Capital item – something that has a useful life of more than one year.  All other costs are revenue costs.

Source:  Rumble, G.  1997. The Costs and Economics of Open and Distance Learning.

Now, what would you do with all of these models?  How do you plan a budget? I’ll go through a little exercise here as an example.

Say you have been hired to be the director of a small distance education program within a public institution.  You have a staff of 4 people, including yourself.  They include an instructional designer, a student services (registration/record keeping) staff person and a secretary.  You have their salaries and benefits to consider.

The institution has given you office space, so you don’t have facility overhead but you do have an operating budget for office supplies, printing, phone bills and whatever else is needed to manage the office.

So how many course enrollments will it take to cover the staff and office expenses?  Here are some figures to work with.

Salaries Office staff

Director                                   $50,000

Instructional Technologist          $40,000

Student Services Staff             $25,000

Secretary                                 $20,000

                   Total                     $135,000

Operating budget

Office Supplies                         $5000

Printing                                     $7500

Phone                                        $2000

Software budget for

Instructional Technologist          $4000

Misc.                                        $5500

                   Total           $24000                 Grand total expenses  $159,000

So now we need to determine income.  Your unit is offering 30 undergraduate courses, all three credit hours, in the first year.  Your tuition per credit hour is $125.00.  To break even it would take 425 enrollments.  That would be 425 enrollments X 3 credit hours per each enrollment X $125 per credit hour = $159,375.    500 enrollments would provide an income of $187,500.

This simple (and not very realistic) form of budget planning does not include things like your fixed costs, your variable costs, your indirect costs but it does help to plan how much marketing you need to do to meet your enrollment project so that you can cover your costs.  One area you do not skimp on when planning your budget is in your marketing.  Without enrollments you cannot make a program or course work.  

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