How Much Does It Cost?

How Much Does It Cost? Eileen G. McLoughlin, Assistant Vice President of Finance and Budgeting, Rensselaer Polytechnic Institute Charles Tegen, Associate Vice President for Finance and Comptroller, Clemson University 2013 Managerial Accounting and Decision Support Salt Lake City, Utah November 14, 2013 Agenda Overview of cost accounting topics Review current methodologies and applications in higher education Indirect cost or facilities & administrative (F&A) recovery rate NACUBO Cost of College Program costing Assessing costs to internal units

I believe it is some sort of cost accounting presentation. Cost Accounting What is it and Why? A means of analyzing a process to answer the question: What is the cost? Understand business model/structure: fixed vs. variable Methods of accumulating costs of activities vary depending on the specific cost question

Cost Accounting What is it and Why? Combination of financial and other relevant data or cost drivers to create costing models to support decisions Financial accounting information supplemented by non financial data such as enrollment, credit hour production, faculty or staff full time equivalents, square feet, etc. Communication tool for decision makers Consider. Before we get too deep in cost accounting, think Select a methodology that works within your environment, for your purpose, to answer your or a decision maker cost questions Cost accounting is an art and a science Different methodologies will yield different answers Need to be confident in the method chosen and that the general ledger is the source Make sure the process will add value

Applications in Higher Education Institutional costing Program budgeting or charges Assessing costs to internal units Communication tool Costing in Higher Education Current Interest Literature on costing is plentiful but may be focused on the for profit sector Department of Education and other governmental agencies Higher education costing lacks uniformity and precision Responsibility center management practices NACUBO s Cost of College does provide uniformity Delta Cost Project

Costing in Higher Education Current Interest Functional classifications are seldom pure due to the multiple mission focus of higher education Principle focus has been on student/teacher ratios and contact hours i.e. student contact hours, teacher contact hours, head counts, and class size Higher education cost accounting has been dominated by the requirements of OMB Circular A 21 and companion circulars. Economic Challenges Intensifying Interest Funding Endowment performance or State funding Students affordability Public accountability and transparency movement Demands for programs are changing Interest is more in cost and output Questions about value added or ROI Need to understand and manage costs

Current Environment Cost of attendance Can institutions be less costly? Cost of degree Can institutions graduate more students with same budget by increasing retention? Return on Investment or Value add GASB /FASB allocation of overhead costs to mission programs for IPEDS reporting Operations and maintenance Depreciation Interest expense Pressure is for colleges to understand and speak simply to its costs Indirect Cost Recovery Rate or Facilities & Administrative (F&A) Recovery Rate 12

Indirect Cost Recovery Rate or F&A Rate Indirect cost recovery rules have a specific objective: develop an overhead rate for projects funded by sponsored contracts develop a rate to capture costs that are not specific or direct to a project but provide overall institutional support operation and maintenance library administration depreciation Indirect Cost Recovery Rate or F&A Rate Indirect cost recovery rate is expressed as a percentage of modified total direct costs allocated to sponsored program effort Research support focus Proposals are submitted to an institution s federal cognizant agency Rate proposal is submitted, audited by the agency, and then negotiated is approved Goal is to reimburse an institution for the facilities and administrative costs incurred in supporting research contracts, never 100% reimbursement

F&A Rate Data Three primary types of data used: Financial current fund expenditures by program Space The net assignable square feet (NASF) and functional use of all space, owned or leased, occupied by any unit of the university Demographic The number of students, faculty, and staff at the university F&A Rate Calculation Required audited annual financial reports Expenses all current fund expenditures by budget and object code for salaries and wages, benefits, supplies, rent paid centrally, utilities, security, insurance, interest, maintenance, professional services and programs Depreciation amounts posted and reported for capital assets, such as buildings and equipment on the audited financial statements

F&A Rate Calculation Unallowables expenditures posted to non research budgets that cannot be charged to the federal government through the F&A rate Cost sharing dollar amounts required to be transferred from non research source budgets to grant or contract budgets Budget cost categories cost pools assigned to all current fund budgets F&A Rate Calculation All allowable and allocable Facilities and Administrative Costs are allocated to Direct Cost functions using a step down methodology specified in OMB Circular A 21.

F&A Rate Calculation F&A expense = F&A cost rate MTDC base ( + cost sharing) Where: F&A expenses = all allowable indirect costs allocated to organized research MTDC base = all allowable direct cost expenditures classified as organized research F&A cost rate = rate to be applied during a given period F&A Cost Example RESEARCH F&A RATE Allocated to Research Calculated Capped * Cost Pool Description Research MTDC Base Rate Rate Facilities Costs - Space Survey Building Depreciation $ 14,500,000 $ 250,000,000 5.80% Building Interest 5,000,000 $ 250,000,000 2.00% Equipment Depreciation 10,000,000 $ 250,000,000 4.00% Operations & Maintenance 50,000,000 $ 250,000,000 20.00% Libraries 5,000,000 $ 250,000,000 2.00% Facilities totals $ 84,500,000 33.80% 33.80% Administrative Costs General Administration $ 30,000,000 $ 400,000,000 7.50% Departmental Administration 75,000,000 $ 400,000,000 18.75% Sponsored Projects Administration 9,000,000 $ 400,000,000 2.25% Administrative totals $ 114,000,000 28.50% 26.00% Utility Allowance 1.30% 1.30% Total Organized Research Rate 63.60% 61.10% * A-21 limits the Administrative total to no more than 26%

NACUBO Cost of College NACUBO Cost of College Program Objectives Provides a uniform methodology that any college or university could use to explain the cost of one year of undergraduate education Contributes to a better public understanding of the kinds of expenditures made to deliver higher education Can highlight the cost of education versus the price charged per student

NACUBO Cost of College Program Identifies undergraduate costs in three sections Instructional and student services Institutional and community costs Undergraduate financial aid costs Provides a cost per student NACUBO Cost of College Program Methodology Relies on basic averaging techniques Concentrates on the cost of undergraduate education Simple to use and understand Standard template

NACUBO Cost of College Program Observations Methodology works for its intended purpose but not precise Methodology more closely approximates the true costs for some better than others No value judgments should be made as to good or bad results for institutions Similarities and differences fit the known differences among institutions Cost nearly always exceeds price of education Delta Cost Project Provides IPEDS database on spending Proposes the following metrics Average spending per student Average spending per degree conferred Estimates of costs associated with excess credits and with student attrition Cost, price and subsidy structures, and the proportion of average costs that are subsidized by student tuitions Marginal cost per student by program and level of instruction

Program Costing Purpose Determine at the program (department) level the profitability of programs based on tuition and fee revenue generated less direct and indirect costs

Registration Data Requirements Student credit hours majors Average class size Number of sections Faculty FTE Full time faculty Direct Data Requirements Total salaries by department Salary cost per credit hour Total instructional cost Instructional cost per credit hour Tuition generated by department Capital costs department specific

Indirect Cost Data Requirements Total cost of non revenue generating departments College wide departmental square footage Allocation of Core Curriculum Core curriculums need to be allocated back to departmental programs that provide these services to determine overall departmental costs.

Revenue Generation Determine total tuition generated by programs Calculate total student credit hours and program percentage majors Allocate total tuition share by % of student credit hours in program Add additional program specific fees to determine program tuition. Direct Program Costs Calculate salary (direct) & benefit costs (allocated by FTE) Determine specific programs costs Instructional Capital specific to program

Indirect Program Costs Calculate total costs of all non revenue generating departments / programs (i.e. library, student services, business office, financial aid, etc.) Recommend separation of facility operations vs. specific other departments Indirect Program Costs Calculate indirect non facility costs Total non facility costs x program credit hours % Calculate indirect facility costs Total facility costs x program square footage %

Summary Calculation Total program revenue (Direct program costs) (Indirect program costs) Net program profitability School of Science Contribution Margin by Department Fiscal Year XXXX $(000s) 2525 2526 2530 2540 2545 2550 2560 2570 2580 2585 2590 2595 Total SoS Office Masters Program Biology Chemistry Polymer Synthesis Center Computer Science Earth & Environment Math Physics W.Milton Ext. Pgm Direct Revenue Undergraduate Tuition 24,514 - - 3,113 3,021-6,574 1,065 6,593 4,148 - - - Graduate Tuition 2,818 - - 145 551-940 200 591 391 - - - Gross Tuition 27,332 - - 3,258 3,572-7,514 1,265 7,184 4,539 - - - Auxiliary Income - - - - - - - - - - - - - Financial Aid: Undergraduate (7,562) - - (935) (921) - (2,059) (339) (2,020) (1,288) - - - Fresh Water Institute Net Student Revenue 19,770 - - 2,323 2,651-5,455 926 5,164 3,251 - - - Sponsored Research 7,846 157-553 2,482 22 608 741 1,062 1,793-428 - Other Sponsored Programs 4,769 1,973-50 149 2 343 134 1,431 573-89 25 Gitfs/Other Income - - - - - - - - - - - - - Total Direct Revenue 32,385 2,130-2,926 5,282 24 6,406 1,801 7,657 5,617-517 25 Direct Expense Direct Instruction 13,755 1,394 4 1,355 2,814-2,455 624 2,450 2,591 72 (4) - Reserve Transfer - - - - - - - - - - - - - Auxiliary Expense - - - - - - - - - - - - - Sponsored Research 5,710 119-413 1,738 14 380 535 739 1,384-388 - Other Sponsored Programs 4,691 2,086-41 123 2 306 134 1,336 564-76 23 Restr Endowmt Admin Surchg (89) (65) - - (2) - - - - - - (22) - Oper & Maint - Direct 1,702 20-122 1,159-60 63 39 152-87 - Other Expense - - - - - - - - - - - - - Total Direct Expense 25,769 3,554 4 1,931 5,832 16 3,201 1,356 4,564 4,691 72 525 23 Contribution Margin $ 6,616 (1,424) (4) 995 (550) 8 3,205 445 3,093 926 (72) (8) 2 Contribution Margin % 20.4% -66.9% #DIV/0! 34.0% -10.4% 33.3% 50.0% 24.7% 40.4% 16.5% #DIV/0! -1.5% 8.0% CIPCE 38

RENSSELAER POLYTECHNIC INSTITUTE INCENTIVE BASED BUDGETING III. Framework (000's) Line Items Brief Description TOTAL INSTITUTE DIRECT REVENUE Undergraduate Tuition Graduate Tuition Gross Tuition Auxiliary Revenue Financial Aid: Undergraduate Financial Aid: Graduate Net Student Revenue Sponsored Research Other Sponsored Programs Restricted Endowment Income Designated Funds Gift/Other Income Volume Adjustment Total Direct Revenue Revenues allocated based on credit hours taught & student enrollment, 80 / 20 split Revenues allocated based on credit hours taught Housing & Food, Field House, Health Svcs, the Union and Telecom Billings Institute average discount % applied to undergraduate tuition, room, board, and student health & activity fees Research dollars recognized as spent, overhead included Grants & gifts recognized as spent, overhead and surcharge included Restricted expendable/linac & Incubator gross revenues DIRECT EXPENSE Direct Instruction School operating budgets Reserve Transfer Auxiliary Expense Operating budget Sponsored Research Direct research expenses (compensation, supplies, equipment & travel ) Other Sponsored Programs Direct grants and gift expenses (compensation, supplies, equipment & travel ) Restricted Endowment Surcharge 10% of endowment income earned Designated Funds Operations & Maint - Direct Utilities & debt service charged based on occupied square feet, utilities and depreciation rates Deans Administration Other Expense LINAC and Incubator operating budgets Total Direct Expense CONTRIBUTION MARGIN $ CONTRIBUTION MARGIN % 39 RENSSELAER POLYTECHNIC INSTITUTE INCENTIVE BASED BUDGETING III. Framework TOTAL INSTITUTE (000's) Line Items Brief Description INDIRECT REVENUE Unrestricted Expend. Gifts Investment Income Endowment Campaign Planning Endowment SI Funding Other Misc. Income Total Indirect Revenue INDIRECT EXPENSE Provost President's Office Student Life Finance Human Resources Administration Institute Advancement Capital Campaign Planning Government Relations Intellectual Properties Strategic Investment Subtotal Divisions INSTITUTE WIDE Indirect Debt Service Indirect Utilities Other Subtotal Institute Wide The annual fund Endowment spending formula and cash management Temporary funding from the endowment to support the current Campaign Temporary funding from the endowment for strategic investment, a 5yr Board approved program Parking revenue, patent income, physical education miscellaneous rentals Operating budgets for the Provost's Office, research cost share, Graduate Admissions, computing, and libraries Operating budgets for the President's Office and confidential payroll Operating budgets for Undergraduate Admissions, Dean of Students, Registrar, and Bursar Operating budgets for the Controller, Treasury, Internal Audit, and Budgeting & Financial Planning Operating budget Operating budgets for Environmental Services and Physical Plant, Campus Planning & Facilities Design, Public Safety, Contracts and Grants, and Purchasing Operating budgets for Development, Marketing and Media, University Events Funding from the endowment for Campaign expenditures Operating budget Operating budget Funding from the endowment for strategic investment expenditures Debt service allocated to indirect units based on occupied square feet and depreciation rates Utilities allocated to indirect units based on occupied square feet and utilities rates Net benefits, research incentive, insurance and audit, banking and legal fees Total Indirect Expenditures 40

Assessing Costs to Internal Units Why assess internal units Which costs to allocate Cost distribution methodologies Which units to distribute to Why Assess Costs to Internal Units Protect student investment Public policy: state tax dollars should not subsidize certain activities Distribute costs to units benefiting from services Make users of services accountable Decentralized environment Unrestricted sources assuming burden Pricing tuition vs. fees

General and administrative costs Fringe benefits Telecommunications, information technology Facilities management: rent, utilities, maintenance Investment management Development activities: gift accounting, event planning, prospect research, major gift officers Implementation of systems Which Costs to Allocate What factors are driving the cost allocation? State or federal requirement True recovery of costs to central activities Full program costing What activity base to use? Easy to calculate Considerations in Selecting an Allocation Methodology Easily understood and unbiased How much precision is required?

Cost Distribution Methodologies Directly related to services provided Telephone service requests Market rate rents Utility usage (individual metering) Pooled costs allocated over a specific base Full time equivalent (employee or student) Assignable square foot IP address Number of gift prospects invited to gala event Cost Distribution Methodologies Revenue tax Percentage of tuition, gifts, investment income Not a direct allocation of costs may not recover 100% Easy to apply Hard to avoid Negotiated cost allocation Annual renegotiation Can be tedious, contentious, defensive Prospective recovery rate based on prior experience Assessed to expense base Annual settlement of prior under or over recovery

Fringe benefit costs Cost Distribution Methodologies Accumulate into cost pools Determine what to include (consider F&A guidelines) Standard: FICA and Medicare; health, life, disability insurances; workers comp; retirement Other: end of career pay outs; education benefits How to distribute Equally to all employees Differential rates for faculty vs. staff Differential rates for sponsored programs vs. E&G Makes units conscious of full employment costs Cost Distribution Methodologies Fundraising costs Tax on gifts as raised Directly related effort to benefit Percentage from endowment earnings Keeps taxing past gifts; ignores non endowment gifts Fee for services Assess schools fees for prospects who attend galas and reunions; for prospect research; for gift accounting; etc. Annual giving Other?

Which Units to Distribute Costs To All costs to all units? Effectively responsibility center management To units which are not core to mission Auxiliaries Medical Center, hospitals Certain academic areas Non credit/outreach programs Making auxiliaries whole can impact tuition discount/ financial aid cost Resources NACUBO Cost of College http://www.nacubo.org/research/nacubo_research_projects/college_pricing_ and_financial_aid/cost_of_college_study.html Delta Project on Postsecondary Education Costs, Productivity, and Accountability http://www.deltacostproject.org/ 50

Questions? 51