Management Information for Decision Making: Costing Guidelines for Higher Education Institutions
October 1996
Reference M 28/96
KPMG Management Consulting
The electronic version of this document contains the Contents, Summary and Introduction only. The complete printed document is available from the HEFCE.
Contents
- 1 Summary and introduction
- 1.1 Overview
- 1.2 Introduction
- 1.3 Costing in Higher Education
- 1.4 Benefits of improved costing
- 1.5 An institutional costing framework
- 1.6 What value can the Guidelines add?
- 1.7 Costing requirements in HEIs
- 1.8 Departmental costing
- 1.9 Structure of the Guidelines
- 1. 10 Implementation
- 2 Framework for costing within HEIs
- 2.1 Summary
- 2.2 Activities and outputs of HEIs
- 2.3 The costing process: direct and indirect costs
- 2.4 Costing practice in the sector
- 2.5 Examples of costing practice in pilot institutions
- 2.6 Requirements for costing in HEIs
- 2.7 Building an institutional costing framework
- 3 Cost principles, methods and processes
- 3.1 Types of costs
- 3.2 Basic costing principles
- 3.3 Cost pools and basis for allocation
- 3.4 Costing methods
- 3.5 The costing process
- 4 Practical guidance for HE costing
- 4.1 Summary
- 4.2 Costing at institutional level
- 4.3 Costing by organisational unit (faculty)
- 4.4 Costing by activity with faculty
- 4.5 Costing within an academic department
- 4.6 Costing within a nonacademic department
- Appendices
- A1 Study methodology
- A2 Case study: The University of Tynebridge
- A3 Distribution of staff costs
- A4 System implications
- A5 Capital assets
- A6 Glossary of terms, definitions and abbreviations
- A7 References and suggested further reading
1 Summary and introduction
A general study of costing in Higher Education (HE) is timely for a combination of reasons:
- the financial pressures on institutions are steadily increasing;
- cost information is needed to support decisions on which activities continue or eliminate;
- there are examples of good practice in the sector, but few institutions have cost information appropriate for decision making;
- financial planning and management could be strengthened if institutions had a more considered understanding of their costs;
- a survey undertaken for this study suggests that academic managers generally need a better understanding of their costs;
- a more consistent approach within institutions could save time and effort spent on inappropriate costing and provide better management information;
- with suitable guidance, many institutions could gain the benefits of good practice in costing at negligible additional cost.
This is a summary of the Joint Funding Councils' Study of Costing for Decision Making in Higher Education Institutions (HEIs). The purpose of the study was to identify good practice in costing for HEIs and to suggest methods and approaches which could help institutions to meet their objectives more successfully. The study does not deal with pricing, although good costing practices will inform pricing decisions and negotiations.
The study was sponsored by the Higher Education Funding Councils of England, Scotland, and Wales and was undertaken during the period May to October 1996. Advice and guidance were provided by a steering group chaired by Professor David Westbury, VicePrincipal of the University of Birmingham, and including both academic and financial representatives from the sector. Members of the steering group are listed in Appendix 1.
As part of the study, the team conducted a detailed review of policies, requirements for costing, and current costing practice at ten pilot institutions which volunteered to participate in the study. The pilots have contributed valuable comments on this report, as well as examples of policies and practice in the sector. The report also draws on information provided by 160 institutions in response to a questionnaire issued to all HEIs on their practices and requirements for costing.
The main output from this study is the report 'Management Information for Decision Making: Costing Guidelines for Higher Education Institutions' (the Guidelines). The Guidelines, which are written in non technical language, set out good practice in costing for institutions in the current HE environment. They form a living document and will be subject to change as the environment for HE costing changes.
The Guidelines cover strategic and policy issues as well as providing a wide range of suggested methods and worked examples of the most common costing requirements in HEIs. They are intended to provide a useful set of tools which can be taken 'off the shelf' by institutional managers without presupposing any accounting or financial management expertise.
The Guidelines are not primarily designed for directors of finance who will generally be aware of costing techniques. The main value of the Guidelines should be in helping academic managers who need to cost their services; and in contributing to a more general awareness of costing issues and good practice in institutions.
1.3 Costing in Higher Education
Given the size and complexity of HEIs, and their individuality, it is not surprising that there is a range of different requirements for costing. Typically, these include costing at institutionwide level, and within individual academic and support departments. These requirements are both strategic (eg to assist in allocation of funds within the institution), and operational (eg to calculate a breakeven student number for a new course). All institutions are required by the Financial Memorandum to assess the full costs of research and other services to external customers.
Practice across the sector varies. Within the ten pilot institutions there is a full range from simple or nonexistent costing methods through to quite complex models, albeit the latter are usually not fully implemented.
A few of the pilot institutions have developed models which encompass all institutional costs (at varying levels of complexity), but none of these includes all the costs which a commercial business would include in pricing its products or services. Most institutions have calculated an indirect cost rate for research contracts, but some of these are based on such broad assumptions that the institutions cannot know the full costs of individual research contracts.
In general, institutions have adopted lowcost pragmatic approaches to costing which often leave a good deal of discretion to individual departments. The reasons for this relatively low priority given to costing in the sector are complex. They include the historic culture of higher education as a public service; difficulties with the principle and practice of monitoring the use of academic staff time; and the fact that HEIs are not commercial businesses and operate in an environment which does not encourage commercialstyle costing. The market resistance to paying realistic indirect costs on research contracts illustrates this culture.
1.4 Benefits of improved costing
Many in the sector think of costing in terms of recovering indirect costs from research and other contracts. This is an important issue, but is not the main reason for costing. The primary benefit will be in giving institutions a better understanding of their cost structures and drivers, and hence a better basis for resource allocation and planning. This will in turn lead to a more corporate view of the cost of individual activities and of how to manage resources to maximise institutional benefit. Without an institutional view on these questions, it is left to individual heads of departments to develop their own methods. The evidence is that this is potentially wasteful and may lead to inconsistency and lost opportunities.
It appears that few managers within institutions are in a position to know the costs of their external contracts calculated to a standard which satisfies the condition in the Financial Memorandum and the recommendations of the 1988 Hanham Report on costing research in universities. There are market reasons why pricing will not and cannot always cover costs. However, a fundamental premise of this study is that HEIs need robust costing systems so they can be aware of the full economic costs of their activities. Pricing decisions will therefore be conscious rather than inadvertent, and financial planning and management should be more effective as a result.
Many institutions are interested in bench marking and improving their business processes, particularly in the nonacademic support areas, as this is a possible route to enhanced quality at a time of funding constraints. The benefits of this are only possible with good costing practice which gives fair and robust information on unit costs.
The principal benefits of improved costing practices are therefore:
- better understanding within institutions of the options available;
- a more strategic approach to financial planning;
- a more consistent approach to evaluating existing and new activities;
- greater understanding of the financial implications of academic decisions; and
- a more credible basis for pricing and negotiation with commercial clients.
1.5 An institutional costing framework
The Guidelines recognise the environment in which HEls are operating. They are not prescriptive and they do not require institutions to adopt inappropriate commercial practice, or to develop complex institutionwide costing models (although some are doing so and others may find this worthwhile).
The Guidelines do recommend that every HEI should have an institutional framework for costing. This means that senior management have a considered approach to costing, and communicate this throughout the institution, rather than leaving it to individual departmental managers to invent their own techniques. It does not imply that every activity must be costed, or that costing methods must be complex or expensive. However, it would mean that all elements of cost have been considered, and some of the inconsistent and inappropriate treatments of cost seen in the sector would be reviewed.
Each HEI is unique and should establish its own costing framework. The minimum that would be desirable as good practice in establishing a costing framework would be:
(i) the institution has a considered view of how it wishes to cost activities, based on an understanding of cost structures and drivers, and of its practical requirements for cost information to support decisionmaking;
(ii) there is an appropriate institutional indirect cost model and procedures for its application on a consistent basis by departments;
(iii) departmental managers have access to simple guidance on how to cost processes and activities, with appropriate support and training available.
Although this could be regarded as a modest specification, this study suggests that few institutions would currently meet it completely. Academic managers within HEIs are often unaware of the full costs of activities, and institutions generally lack a firm cost basis for their decisions on resource allocation and management.
1.6 What value can the Guidelines add?
The Guidelines aim to help institutions improve the quality of their management information for decision making by meeting the specification above. They provide tools and advice which institutions can adapt to their own circumstances.
Institutions could establish the first element of the costing framework described above quickly and with little effort, based on a discussion of this report. Going on to the more operational requirements (ii and iii above), the Guidelines are focused around the most common costing requirements identified by institutions. These are illustrated in the Figure below. For each requirement (cost objective), the Guidelines review a range of methods from the simple to the complex which institutions can select according to their needs and interests. This practical guidance is supported by theoretical sections and worked examples.
1.7 Costing requirements in HEIs
Costing requirements in HEIs
| Organisational unit | Cost objective |
| Institution | costs of departments and activities |
| institutional indirect cost model | |
| academic department | departmental cost model |
| cost of existing course/activity | |
| cost of new project/course | |
| Nonacademic department | charge out rate for service |
At institutional level, the two basic requirements are:
- to cost organisational units (departments) and activities as a basis for planning and resource allocation and to provide a framework for departmental costing; and
- to calculate indirect cost rates for contract costing.
The first requirement is commonly driven by resource allocation policies and resource allocation models. As already noted, some institutions charge indirect costs to departments and there is a wide range of approaches. However, few models have all the features that will produce costs that are useful for a wide range of decision making. Section 4 provides a stepbystep process which will ensure good practice. Institutions that follow the worked examples, or have an equivalent process, will be able to assess the full cost of research contracts; residences, catering and conferences; and services to external customers.
Most institutions do not yet have an institutional costing model which charges indirect costs to academic and nonacademic areas, and some may consider it inappropriate to develop one. In this case, it is necessary to calculate an institutional indirect cost amount or rate (percentage figure) to be added to the direct costs of a research project (or other service to be costed) in order to ensure that full institutional costs are estimated. Whether indirect costs are recovered is a matter of pricing not costing. This method has been very well described in earlier guidance to the sector in the Hanham Report. However, it is notable that, nearly ten years after Hanham, a large number of institutions have not implemented this guidance in accord with the principles of good practice identified in these Guidelines.
Key policy issues to be considered in calculating indirect costs are the appropriate treatment of costs (some HEIs include costs that are not relevant, others omit relevant costs), using appropriate cost pools and drivers, and dealing sensibly with the issue of apportioning academic staff costs. The Guidelines suggest practical approaches to apportioning academic staff cost to activities which avoid the need for staff to complete timesheets (see Appendix 3).
Good practice requires that, for most institutions, there should be more than a single indirect cost amount or rate (it should vary with the type of department or activity) and that care should be taken in the way the calculation is performed to ensure the relevance of the basis used.
At departmental level, there is perhaps even greater benefit to be gained from institutions adopting a consistent institutional approach. It is common practice to cost new courses or projects because this is usually a requirement for institutional approval. However, it is unusual to cost existing activities or to use cost information in any systematic manner as a determinant of resource allocation and performance measurement within departments. Those departmental managers who wish to do this tend to be left to develop their own methods with obvious disadvantages. The Guidelines provide a series of methods for costing in an academic and in a support department. These include:
- developing a departmental costing model;
- costing an existing course or activity;
- costing a new project or course.
1.9 Structure of the Guidelines
The Guidelines are modular so that managers with different needs and experience can refer to the relevant sections. The main sections of the report and the purpose and intended audience for each are as follows.
Section 2: Framework for costing in HEIs
This section provides an overview of costing at institutional level, a review of practice in the sector, and a recommended approach to costing which all institutions could adopt, drawing on material in the Guidelines. This section may be a useful starting point for most readers.
Section 3: Costing principles, methods and process
This section provides the theory underpinning costing for HEIs and describes the various accounting techniques and terms used. It sets out a simple sixstep process for costing which can be applied in any application to ensure that a consistent approach is adopted. This section could be omitted by managers who simply wish to know 'how to do it'; they could go straight to Section 4. However, it provides a discussion of costing methods and terminology which managers may find useful in costing discussions and decisions.
Section 4: Practical guidance for HE costing
This section provides practical and nontechnical guidance on 'how to do it' with full details of the methods available, recommended good practice, and worked examples for the most common costing requirements for institutions, academic departments and support departments.
This section is aimed at the nonaccountant manager who wishes to find the quickest and easiest way to satisfy a particular costing requirement. It can be circulated as a self-contained document.
The Appendices include advice on particularly difficult issues or techniques, such as academic staff costs, capital assets, and systems implications. They also include a glossary of terms and definitions.
The approach adopted in the Guidelines is an evolutionary one which builds on experience and practice in the sector, and takes account of the requirements and capabilities of institutions. For most institutions, implementing the minimum costing framework in Section 2 and using the guidance in Section 4 should have almost no cash cost, and would involve only a minimal and shortterm increase in staff effort. This process would be associated with discussions in the appropriate senior management forum; dissemination of guidance within the institution; and provision of some basic support and training for departmental managers involved in costing. The Guidelines provide a useful starting point for the implementation process.
At this level of implementation, there are no requirements for new computer systems, as all the analysis and calculations required can be done using the spreadsheet packages that exist within all HEls.