Costing for the Service Industry [1 ed.] 1527556891, 9781527556898

Citation preview

Costing for the Service Industry

Costing for the Service Industry By

Veda D. Malagatti

Costing for the Service Industry By Veda D. Malagatti This book first published 2020 Cambridge Scholars Publishing Lady Stephenson Library, Newcastle upon Tyne, NE6 2PA, UK British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Copyright © 2020 by Veda D. Malagatti All rights for this book reserved. No part of this book 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. ISBN (10): 1-5275-5689-1 ISBN (13): 978-1-5275-5689-8

TABLE OF CONTENTS

List of Tables ............................................................................................ vii List of Figures.......................................................................................... viii Preface ....................................................................................................... ix Acknowledgements ................................................................................... xi Chapter One ................................................................................................ 1 Brief Evolution & Importance of Costing Cost ....................................................................................................... 1 Cost Accounting ................................................................................... 1 Cost Accountancy ................................................................................. 2 Evolution & Growth of Cost Accounting in India ................................ 2 Requisites of a Cost Accounting System .............................................. 4 Benefits of a Cost Accounting System.................................................. 4 The Requisition of Costing ................................................................... 6 The Objectives of Costing .................................................................. 13 Scope of Costing ................................................................................. 16 Various Methods to Calculate Cost .................................................... 17 Justification for Opting Costing .......................................................... 20 Some Important Concepts Related to Costing .................................... 23 Other Types of Cost for Better Decision-Making ............................... 24 Chapter Two ............................................................................................. 26 Different Methods of Costing Chapter Three ........................................................................................... 30 Estimation of Cost in the Education System Using the Conventional Method Introduction......................................................................................... 30 Preamble of the Indian Education System: An Overview ................... 30 Financing Higher Education ............................................................... 36 Statement of Problem: Changing Pattern of Funding ......................... 38 Review of Literature ........................................................................... 43

vi

Table of Contents

Cost Accounting System for the Education System............................ 47 Methodology ....................................................................................... 51 Analysis & Findings ........................................................................... 60 Other Analysis .................................................................................... 66 Conclusion .......................................................................................... 67 Other Conclusions............................................................................... 70 Recommendations & Scope for Further Research .............................. 71 Chapter Four ............................................................................................. 78 Estimation of Cost Per Kg in the Agriculture Sector Using ABC Costing Introduction......................................................................................... 78 Preamble About Agriculture ............................................................... 80 Assessment for the Cost of Production ............................................... 84 Classification of Items of Costs .......................................................... 90 Review of Literature ........................................................................... 91 Cost Concepts ..................................................................................... 93 Classification of Cost as Per Traditional Costing ............................... 97 Benefits of ABC for an Enterprise ...................................................... 99 ABC for Estimation of Costs in Agriculture ..................................... 103 Analysis & Interpretation .................................................................. 115 Conclusion ....................................................................................... 120 References......................................................................................... 120 Chapter 5 ................................................................................................ 121 Service Costing for Transport Brief History of the Transport Industry ............................................ 121 Preamble of Transportation............................................................... 122 Basic Classification of Cost .............................................................. 126 Estimation of Cost Per Unit Using Service Costing ......................... 134 Analysis Using Service Costing ........................................................ 139 Observation & Analysis .................................................................... 142 Target Costing for Better Decision Making ...................................... 144 Target Costing: An Integration ......................................................... 146 Conclusion ........................................................................................ 147 References......................................................................................... 148 Bibliography ........................................................................................... 150

LIST OF TABLES

Table 3.1 Profile of University ................................................................. 50 Table 3.2 Resource Allocation ................................................................. 52 Table 3.3 Calculation of Total Department Cost ...................................... 54 Table 3.4 Addition of Indirect Overhead for Cost Per Course & Per Student .......................................................................................... 57 Table 3.5 Rank of The Department as Per Total Cost Per Course & Total Cost Per Student ........................................................................ 60 Table 3.6 Overall View of Cost Sheet ...................................................... 65 Table 3.7 Swot Analysis for University ................................................... 69 Table 3.8 Recommendation for Controlling Cost ..................................... 76 Table 4.1 Projection of Growth of Population & Growth for Agricultural Production ........................................................................................... 81 Table 4.2 Different Dimensions & Segmentation of Cost of Production.... 85 Table 4.3 Showing Cost Drivers for Allocation ..................................... 105 Table 4.4 ABC Method for Crop Jowar & Wheat .................................. 107 Table 4.5 ABC Method for Vegetable – Cost Per Unit .......................... 109 Table 4.6 ABC Method for Vegetable – Irrigated & Non-Irrigated Land .................................................................................................. 112 Table 4.7 Classification of Cost by Nature, Relation & Behaviour ........ 115 Table 4.8 Calculation of Profit-Volume Ratio and Breakeven Point...... 120 Table 5.1 Analysis of Cost Per Passenger Per Trip For 5 Routes ........... 139 Table 5.2 Analysis of Cost Per Passenger Per Trip For 5 Routes ........... 140 Table 5.3 Analysis of Cost Per Passenger Per Trip For 5 Routes ........... 141 Table 5.4 Analysis of Cost Per Passenger Per Trip For 3 Routes ........... 142 Table 5.5 Showing Classification of Cost in Ascending Order .............. 144

LIST OF FIGURES

Figure 3.1 Cost Accounting System ......................................................... 47 Figure 3.2 For Tabulation & Analysis Purposes....................................... 51 Figure 3.3 Showing Per Centage of Cost Sheet ........................................ 55 Figure 3.4 Showing Trend of Costs .......................................................... 55 Figure 4.1 Cost by Relation & Behaviour .............................................. 116 Figure 4.2 Per Centage of Using Bullocks for Agriculture..................... 117 Figure 4.3 Per Centage Of Utilization of Man Labour ........................... 118 Figure 4.4 Cost for Various Activities in Agriculture ............................ 119

PREFACE

Costing for the Service Industry was written to help students understand the methodology of costing and its applications. To achieve this goal, students must also develop professional competencies such as strategic/critical thinking, risk analysis, decision making, and ethical reasoning. Most textbooks illustrate the methodology and explain it with ample examples, but in this book, research-based examples with different approaches have been used, like the traditional method in education, ABC (Activity-Based Costing) in the agricultural sector and service costing in transport. As for professional competencies, one should be competent enough to apply these methods in real-life situations. This book tries to bridge the gap between the applications learnt and the implication that they would give appropriate results uniformly everywhere in the world. Many of us fail to recognize that cost accounting information would minimize uncertainties and biases. The failure to use it correctly places undue reliance on computational results and inhibits the ability to evaluate the assumptions, limitations, behavioral implications, and qualitative factors that influence decisions. One of the goals is to learn to increase accounting expertise and focus on qualitative factors to control the influence of assimilation of information; decisions based on such information affects the accuracy of the estimation of cost. The application of different methods of costing in various service sectors dilutes the practice of assumptions, which has a direct impact on making accurate decisions. In some cases, it can hamper the quality of the decision made. Therefore, it essentially consists of analyzing estimations of cost and devising ways to reduce it as far as possible. This requires evaluating productivity and effectiveness as this will indirectly assist in planning, monitoring and controlling the cost and then ultimately fixing the price of the product/service. Costing and cost accounting aids this objective. Costing measures and cost accounting report on the cost performance of different activities of an organization. Cost management, in turn, describes the approaches and activities in the short and long term for planning and control decisions. The resultant decisions would increase the value and decrease the costs. Cost management is an integral part of an organization’s strategy to achieve competency at controlling unavoidable costs. The methodology of costing assists enterprises to grow in a competitive world. One of the most

x

Preface

important objectives of business is to provide a financial management information system as it plays a crucial role in strategizing the appropriate policy for risk mitigation and thus withstand competition.

ACKNOWLEDGEMENTS

The present work is the result of the guidance, co-operation, support, and help that I have received from a number of noble hearts, though it is impossible to name all of them. I’m indeed indebted to my beloved parents, Late Smt. Annapurna and Shri Sidram Harwalkar, Rtd. Govt. servant, Mumbai, whose staunch help has been the source of strength in my life. Words are not enough to express my gratitude to them. My mother divinely guided me throughout my journey. My wishes and acknowledgements towards my beloved husband and my sons, Shri Devanand Malagatti, Ramaswamy Malagatti and Samarth Malagatti respectively, for their untiring persistence, co-operation and inspiration. I owe a lot to my brother, Shri Santosh S. Harwalkar, Director-Business Analyst, India, for his moral support and encouragement during the time it has taken to finalize this book. I’m much obliged to my benevolent professor Dr. A.H. Chachadi, my research guide and emeritus professor of Chetan Business School, for his constant inspiration and motivation. He has always inspired me to think out of the box and has provided excellent guidance on how to hone my skills during my doctoral research, making it a wonderful learning experience. I’m grateful to Dr. Vishwanath Koravi, Director of Chetan Business School and Dr. Ramakant Kulkarni, Director-Academics of Chetan Business School for their moral support. I extend my profuse thanks to all the professors and administrative staff of different universities, farmers from various locations, and drivers of different transport companies with great sincerity and pleasure. I appreciate the time they devoted to our discussions, the information they shared and the valuable guidance they provided. Data were obscured from them, but without them, establishing the foundation of this book would have been an impossible task.

CHAPTER ONE BRIEF EVOLUTION & IMPORTANCE OF COSTING

Costing The ICMA (Institute of Cost and Management Accountants) in London defines costing as “the technique and process of ascertaining the costs”. Costing is the primary function of ascertaining the cost of products and services by following well-established techniques and procedures. Costing as a technique is a body of principles and rules that govern the procedure of ascertaining costs. As Dobson maintained, the technique of costing is never static, nor are its rules fixed for all time. These principles and rules can be modified and improved in light of developments in the business environment and organizations in which costing is being carried out. There are various techniques of costing, like full or absorption costing, historical costing, marginal costing, standard costing, etc. As a process, costing denotes the procedure of ascertaining the costs, which includes identification, allocation, apportionment, and the absorption of costs to cost units. According to W. M. Harpur, “A cost is the value of economic resource used as a result of producing or doing the thing for cost. Cost is the price to be paid for its value”.

Cost Accounting Kohler defines cost accounting as “that branch of accounting dealing with the classification, recording, allocation, summarization and reporting of current and prospective costs”. Wheldon defines cost accounting as “the classifying, recording and appropriate allocation of expenditure for the determination of costs of products or services, the relation of these costs to sales values, and the ascertainment of profitability”. Shilling law defines cost accounting as “the body of concepts, methods and procedures used to measure, analyze, or estimates costs, profitability,

2

Chapter One

and the performance of individual products, departments and other segments of a company’s operations, for either internal or external use or both, and to report on these questions to the interested parties”. Thus, cost accounting is broader in scope than costing and aims at two more functions, namely the: (a) Application of cost control methods, and (b) Ascertainment of the profitability of products, activities, functions, etc. Cost accounting includes cost classification, cost recording, cost collection, cost determination, and cost reporting.

Cost Accountancy The ICMA defined cost accountancy as “the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived therefrom for the purpose of managerial decision making”. Thus, cost accountancy is a comprehensive term that includes costing and cost accounting and aims at cost ascertainment, cost control and ascertainment profitability. It also aims at serving the managers in an organization at different levels in their decision-making process by furnishing relevant cost information obtained from cost accounting.

Evolution of Cost Accounting and Growth of Cost Accounting in India The history of cost accounting can be traced back to the 14th century. In the first stage, cost accounting was concerned only with three prime cost elements: direct material cost, direct labour cost and direct expenses. Later, a distinction between manufacturing and non-manufacturing costs was made by Mr. Norton. Thus, material costs, labour costs, and manufacturing costs constitute the prime costs. Around the time of the 19th century, the importance of non-manufacturing costs (overheads) was recognized as one of the distinct elements of cost. The techniques of estimations and standards were included in cost accounting. Instead of using actual cost, standard costs are used and compared with the actual cost. Cost accounting methods are applied in all types of organizations and enterprises. In modern times, the development of electronic data

Brief Evolution & Importance of Costing

3

processing and information technology plays a significant role in the use and growth of the cost accounting system as well as cost accounting as part of the management information system. Due to the certain limitations of cost accounting, management accounting was also used. Both are internal to the organization and are used as common tools and techniques. In spite of their similarities, there are certain differences between the two. Management accounting is derived from both cost accounting and financial accounting. It deals with the effects and impacts of the costs on business and helps the managers in various ways, not only from the cost point of view but also from different angles so they can make better decisions. The application of cost accounting methods in industry was evident at the beginning of the 20th century. The following factors have accelerated the system of cost accounting in India: 1) Increased awareness of cost-consciousness by the Indian industrialists. 2) Growing competition among manufacturers. 3) Changing government policies relating to the economy, accounting, and taxation. 4) Increased government control over pricing led to manufacturers giving the utmost importance to the installation of cost accounting. 5) Increased consumer awareness of process costs, the quality and cost of goods and services, brand performance, and the image of the organization. 6) The establishment of various regulatory authorities to regulate the functioning of private and public enterprises, and also government agencies across the sectors and their activities, has led to the adoption of suitable costing and cost accounting policies, and practices in their systems to fulfill the interests of the stakeholders and the government. 7) Increased competition in the market and enhanced awareness on the part of consumers, employees, investors, suppliers etc. have compelled the Indian enterprises to adopt suitable costing and cost accounting practices. 8) The importance of cost accounting and cost audits was recognized in all kinds of organizations after the economic reforms launched in 1991. Cost audits were made compulsory in 45 public enterprises, and there is a move to make it compulsory in other public and private enterprises in the years to come.

4

Chapter One

9) The provision of a cost audit under section 233B of the Companies Act has given impetus to the development of cost accounting in India. The Vivan Bose Enquiry Commission brought to light various malpractices prevalent in manufacturing establishments, and it was thought that the financial audit at the end of the year was insufficient to judge the real efficiency of manufacturing organizations. As a result, the concept of a cost audit emerged in order to understand how to best utilize the resources of the manufacturing organizations.

Requisites of a Cost Accounting System The following are the essential requirements of an ideal cost accounting system for organizations: 1) Accuracy 2) Simplicity 3) Elasticity 4) Economy 5) Comparability 6) Promptness 7) Periodical preparation of accounts 8) Reconciliation with financial accounting 9) Uniformity 10) Equity

Benefits of a Cost Accounting System ™ Effective access to account books as per cost accounting norms In today’s world, an education institution is no less complex than a fledging corporate house. Therefore, it goes without saying that the recording and maintaining of costs should be done as per cost accounting norms, one of the best concepts in modern management practices and state-of-the-art technology for managing internal and external operations. It encompasses and integrates all pillars of an institute’s activities – academic, administrative, and financial. ™ Effective MIS records for different users In these days of information overdrive, it is critical to possess an efficient management information system that facilitates cost information,

Brief Evolution & Importance of Costing

5

cost access, cost accessibility, and responsive and effective decisions regarding cost control, reduction, management in terms of its objectives, and brand image enhancement. This is why most progressive corporations spend heavily on their MIS. It further facilitates the automation of all key processes of an institute, which forms the backbone of a comprehensive MIS. It is accessed through the internet, which enables a wider and convenient usage of information for all types of stakeholders.

™ Effective usage by different stakeholders It addresses the information and data processing needs of all the partners of the institute. The data warehouse is the House of Information to be used to resolve any problems that arise. Dealing with problems at the initial stage is crucial for sustainability. ™ Effective planning during budgeting: Aids in the planning process Planning the provisional targets that result from exogenous data about future trends and movements according to future needs, the trend of demand for any courses, special projects, and the estimation of income and expenses based on the previous year’s statements all come under budgeting. The targets also relate to quantitative and qualitative trends, such as the challenges to be met in the technical coefficients or the percentage of such statistical measurements as well as the relatively precise judgments on which priorities to act on, the cost estimations, sources of finance to make clear what the proportion of expenditure should be, the subject of policy options, etc. It is also necessary to evaluate the summation of price trends for the production of individual price trends for better forecasting. ™ Effective budgetary control quantitative targets and qualitative targets Capital costs vary considerably according to the type of establishment, size, category, etc. This includes all capital investment, i.e. buildings, the repairs and maintenance of such buildings, land, and expenditures further related as per region and size of establishments, which also includes the technical aids and equipment used to derive the average cost of capital and equipment per unit. An increase in the proportion of quantity, the expansion of networks or a reduction in the average ratio creates variations in the operating expenditure, which would definitely influence the average level of recurrent unit cost. These contribute to performance in quantitative

Chapter One

6

terms. The value of intellectual property or the brand name resembles the qualitative terms for which forecasting is also needed. ™ Perform activity analysis Performance should be evaluated in terms of financial and nonfinancial returns. Financial parameters measure productivity, efficiency and effectiveness, and non-financial parameters measure quality.

The Requisition of Costing 1) Estimation of costs This is one of the prime objectives of costing. Costs can be classified as resources sacrificed or foregone to achieve a specific objective. The cost is the price paid for a value. Costs can be bifurcated into:

™ Direct and fixed ™ Direct and variable ™ Indirect and fixed ™ Indirect and variable All direct costs are prime costs. All indirect costs – fixed and variable – are overheads. A combination of various classifications of expenditure is crucial during the estimation of costs. Different methods of costing also help us to know whether the apportionment of overheads is exact. Allocation means “the allotment of whole items of costs to cost centers or cost units.” Apportionment means “the allotment in proportions of items to cost centers or cost units.” Job and process analyses involve allocating the normal cost to a particular job and the process of performing that job. The time factor also plays a crucial role as it has a direct impact on returns. The shorter the time, the greater the influence of seasonal patterns on the level of costs. Let’s take the example of lost luggage at the airport. It represents a highly unsatisfactory performance. It also costs money. Variations – time, waste, and errors – abound in the baggage handling process: misrouting the baggage, reporting the problem, processing the report, searching, retrieving, and finally delivering the lost luggage. When you translate the 6% probability gap of missing luggage into monetary terms, the hard cost of this defect can be much higher than 6% of the overall cost of handling luggage. If the baggage routing process were improved, the margin for error would be reduced and the allocation of resources, both human and

Brief Evolution & Importance of Costing

7

monetary, could be used much more profitably. This error cost can be calculated only when we know our actual cost. Henceforth, the estimation of the cost of any product and service is essential. One method, ABC (activity-based costing) analysis, captures the organizational costs for the factors of production and overheads and applies them to each activity in a well-defined activity structure. The ABC approach involves assigning and attaching overheads to different products and services. It is based on the assumption that cost objects cause particular activities to be carried out which, in turn, incur costs. It is necessary to identify all the cost objects the approach produces and arrange these in a classification scheme called taxonomy. The overheads are allocated according to taxonomy and apportioned to that particular cost object. This helps rectify the error allocation, apportionment, or any biased assignment of overhead to a particular taxonomy. Only after an accurate estimate of cost can we analyze our capacity, efficiency, and standards. 2) Costing helps us to know the cost-effectiveness Cost-effectiveness is the mandate of today. Various methodologies are being rethought because of the significant cost of programs. A detailed cost analysis needs to be carried out to determine how efficient the unitbased process method in terms of cost is in comparison with the previous method. The contribution of marginal costs represents the amount of revenues minus the variable costs that contribute to recovering the fixed costs. Once fixed costs are fully recovered, they contribute to operating incomes. A break-even analysis is that quantity of output where total revenues equal total cost – that is, where the operating income is zero. These analyses assist managers to understand the behaviour of cost. Studying their changing patterns, i.e. fluctuations due to a covariance relationship in correlation or regression, etc., with the market returns is crucial. All these macro and microeconomics, which affect the behaviour of cost, are considered in relation to the estimation of cost. Henceforth, we can strategize various alternatives after calculating cost for each and every concept. The strategy here could be between

™ The cost of recruiting a less qualified teacher/lecturer and training them further, and

™ The cost of recruiting a well-qualified teacher/lecturer and paying them more.

These factors have an effect on the pricing decisions, i.e. the pricefixing policy. For example, Dell sells high-quality computers at competitive

8

Chapter One

prices. To achieve its profit goals, Dell sets aggressive target costs. The company reduces its costs by making innovative design choices before costs get locked in and by improving its manufacturing and delivery processes. Similarly, providing high-quality education at a competitive price is essential. Enriching innovation along with ERP technological aspects have an impact on fixing the price of education. Reducing the fixed cost by increasing operating revenues is the main criteria for pricing decisions. The evolution is to provide optimum quality education to users on a large scale for the least cost. According to UNESCO, the unit cost of education needs to be reduced in order to facilitate the expansion of education in the context of the given financial and human resources. Two main items dominate the determination of the unit cost of education – the salaries of teachers and the teacher/pupil ratio. These monetary and non-monetary factors have an effect on the institution, which has a major influence on the contribution level, and this, in turn, influences pricing decisions. 3) Improving internal efficiency The capacity and capabilities of internal operating inefficiencies are inadequate to meet the growing demands made by educated youths and managers in various disciplines. The pace of expansion is slow and the quality, by and large, uneven across the spectrum. Severe capacity constraints have emerged where demand has increased, but the allocation of public resources is niggardly; the spread of education has been inadequate and iniquitous. It is imperative to bridge the supply-demand gap in high-quality education to retain a competitive edge in the world market. Hence, costing suggests some measures to enhance quality indirectly, and also addresses equity concerns to enhance intrinsic values. It also plays a significant role in facilitating economic development and bringing about social change. To enhance internal efficiency, scarce resources must be utilized to their optimum. The resources must be effectively and efficiently allocated. This demonstrates that by using costing, reasonable pricing, cost of production, low-maintenance construction technology, considerable savings can be made. Capital costs can also be affected by reducing unnecessary and excess costs, whether fixed or variable, when they are not socially or pedagogically essential. One example of this is the central government’s recent announcement that because of the widespread droughts and famine in India, it cut down

Brief Evolution & Importance of Costing

9

on government expenditure by forgoing stays in five-star hotels for days and avoiding unnecessary trips in jet planes and helicopters, etc. Such strategies are heuristic to decreasing costs. These strategies affect the curvature of costing by controlling costs, reducing and segregating unnecessary costs, and finally eliminating unproductive costs. When we know our institution’s capacity for earning income eases over different constraints, it helps us plan for future modifications, innovations, acquisitions, mergers, or partnerships. By assessing our strengths, we can get loans for our acquisitions. Businesses can strategize by increasing their numbers, which reduces the internal micro cost per unit, and which further enhances the internal efficiency of the organization. 4) Decision making The decision-making process focuses on specific decisions, such as accepting or rejecting a one-time-only special offer, sourcing and outsourcing products or services, and replacing or keeping/continuing education courses. We especially stress the importance of distinguishing between relevant and irrelevant items when making these decisions. A decision model is a formal method for making a choice, frequently involving both quantitative and qualitative analyses. Quantitative factors, like income through sales, cost of training, entry into new markets, etc., are measurable in numerical and financial terms. Qualitative factors, like teaching and the quantum of knowledge learned by each and every student, are intangible and not measurable in numerical and financial terms. The five-step decision process is: (a) obtain information, (b) make predictions, (c) choose alternative courses of action, (d) implement decisions, and (e) evaluate performance. Decisions should be made on the expected future revenues or costs, and this must differ among alternative courses of action. In choosing among multiple alternatives when resource capacity is constrained, managers should focus on the scheme that yields the highest contribution margin per unit of the constraining or limiting factor. The decision is based on the financial benefits to an organization. The critical examination of the pros and cons of cost benefits and cost-effectiveness analysis is presented by a suggested framework for decision making. The current cost structure provides an opportunity to appreciate how cost is distributed. However, it is critical to understand that functional and organizational ineffectiveness, inefficiency, incompetence, and mismanagement have a direct negative impact on the bottom line.

Chapter One

10

The need of the hour is to make some crucial management decisions to determine the corporate level of tolerance for accepting and implementing change. Similarly, the following questions must be answered:

™ What should the cost of the activities, cost objects, and services be? ™ What kind of investment can be made in new technologies and training?

™ Should the focus be on enhancing the capabilities to handle additional work and generate more revenue or do more with less by reducing the workforce?

The answers to these questions will help to set the guidelines for reducing the overall costs of the services by optimizing the performance of the information, technology and human resources. 5) Pricing Decisions The three major influences on pricing decisions are customers, competitors and cost. The short-term and long-term targets have an impact on the pricing decisions. The time value is a new innovation in pricing decisions. The whole world is involved in conglomerates. In manufacturing, tangible products are utilized, such as material, labour, machines, etc. In the service sector, there is the involvement of service, which is usually intangible; it can’t be measured exactly, but it can be approximated. All of these can be defined as resources, which are the means for financing the business, and the result is achieved after using them. Human resources also need to be measured; the rate of utilization and, even today, the birth rate are also considered when evaluating the rate of optimum utilization. Organizations can be classified into two main categories: a profit or a non-profit-earning organization. The dominant purpose of the organization in the former category is to earn a profit whereas organizations in the latter category have other prime objectives, such as governing, providing a social service, and being a means of earning a living wage and development in service. Yet both types of organizations, in order to be financed and to operate reliably, need to format their resources. As such:

™ Each business process should be reviewed and analysed to explore the potential for improvement,

™ A vertical analysis must be conducted to minimize the number of steps/tasks by deleting and combining them,

Brief Evolution & Importance of Costing

11

™ A horizontal analysis must be conducted to remove the information bottlenecks by introducing the right technologies, and

™ Each business process must be analysed to determine the skill requirements, and recommendations must be made to provide training to bridge any gaps.

These steps will help establish the business rationale for change, and at the same time, enable refinement of the current model. A blueprint should be developed to highlight the sequence of changes and the implementation of these changes in a systematic fashion should ensure that the expected milestones are met. The emphasis is also on opportunity cost if it arises when there are multiple uses for resources and some alternatives are not selected. Opportunity cost is included in decision making because it represents the best way an organization could have used its resources if it had not made the decisions it did. For example, various choices for calculating opportunity cost may be the: (1) Introduction of educational television, i.e. on a video display in classrooms and its effect on the cost of education. The cost of video screen equipment and its installation, the future cost of repairs, maintenance costs, cost of carrying inventory, etc., should be considered. (2) Upgrading of less qualified lecturers and the effect on cost. The remuneration to less qualified lecturers is usually lower, but the cost of training sessions, the cost of hiring venues for such sessions, etc., should be considered. (3) The cost of upgrading well-qualified lecturers. Remuneration to such lecturers may be high but the upgrading costs may be lower, and this must be analysed in relation to the overall cost. The calculation of various opportunity costs and capacity constraints (limiting factors) have a supplementary role in decision making. The cost analysis of increasing the number of students or adding a new course/curriculum/syllabus may be the cynosure in decision making. As the number of students increases, the cost of service to them decreases as per the experience curve.

12

Chapter One

6) Improving access to finance It is essential to reduce dismal and erratic performance, which largely reflects inertia between the centre and the state. In India, education is the shared responsibility of state/local universities and the central government. In practice, state governments are the main actors. Good organization can overcome the syndrome of central official neglect with impressive results. This study of direct and indirect costs will help to evaluate the contributory and non-contributory costs, where we can control these costs as per our requisites, reduce them if not needed, or eliminate them if found to be a waste. It is important to reduce the role of government publicly but indirectly help it to improve its efficiency in its core function. The latter requires administrative and procedural reforms to enhance internal efficiency, autonomous financing capabilities, etc. By using marginal and ABC costings, unnecessary red tape, which inhibits efficient operation and productivity, can be eliminated. An analysis of indirect costs/variables will help to expedite further reductions in infrastructure bottlenecks and upgrade effective service by aphorizing functions, funds and functionaries. 7) Reduce cost – return disparity A study reveals that society spends twice as much to educate a student of engineering. Only one-fifth of the cost is borne by the student; the remainder is liberally subsidized by the government. There is a need for a corrective formulation to reduce the cost-price disparity. Such subsidized money can be further optimally utilized for additional or other schemes of vocational curriculum or training. The process of Kaizen (continuous improvement) is necessary for Cost-Benefit analysis. 8) Development of pathways for growth We can outline a path for growth after an approximate analysis of cost. We can re-strategize for diversification for further restructuring. As intensification becomes entrenched, the number of students will increase, the costs will lessen and hence investment into diversification to withstand competitiveness can be made. Self-adherence for fostering is crucial. Enhancing knowledge is the key to creating a dynamic and competitive global environment, so it should be made available at a reasonable cost. 9) Affordability After estimating and evaluating costs, we can analyze our strength to survive in this competitive world. The evaluation of costs with respect to income will give us our surplus, if any. When I know my income and

Brief Evolution & Importance of Costing

13

strengths, I can take advantage of various opportunities by availing myself of funds from outside sources at reasonable interest rates. 10) Decentralizing in funding Rather than depending on grants issued by the central government, the “synapses” in governance should be strengthened and resources used to the optimum, slowly leveraging productivity and profitability. These measures not only reduce the burden on central resources but also create a greater sense of responsibility from within as children are not dependent on their parents forever; there is still an affectionate bond, however, and they can discuss at length during the decision-making process. Similarly, we can decentralize ourselves while performing and centralize during the decision- making process. So, we can put constraints on non-contributable surpluses and unnecessary expenditures while stressing our savings and earnings through other modes like consultancy in a committee, vocational returns, etc. Costing helps to uncover waste, control it, reduce it, and finally eliminate it. These cost factors help planning in accordance with micro and macro analyses. All of this data comprises information about human resources which can be used for planning, managing, performing, and organizing. This information acts as inputs for organizers controlling the financial aspects of any enterprise.

The Objectives of Costing 1) Better identification of resources Costing exercises focus mainly on the cost of achieving intermediate indicators rather than the final outcome targets. Costing highlights the most expensive and non-contributing factor that we can eliminate if necessary. It figures out ways of performing work more effectively and efficiently without sacrificing methods. 2) Economies of scale As per the concept of the experience curve, as the number of units increases, the cost of production decreases per unit. Similarly, we can provide education to more people at a lower cost if the intake of students increases and the costs can be diversified on various components of performance, i.e. the job process. The bottlenecks in the process or unnecessary cumulations can be recognized and dealt with.

14

Chapter One

3) Better course and programme mix When we know the true costs of different activities in different courses, then we can consider various alternatives. This will help manipulate the scarcer resources in a much more meaningful way. Various strategies of mixing courses would enable the calculation of accurate and relevant costs and thus the determination of which courses and programs to keep, which to promote and which to cancel. 4) Better cost control system Identifying the costs of different course activities helps determine the value-adding and non-value-adding ones. The non-value-adding ones can be modified or innovated by the induction of new, in-demand courses. Good cost systems do not have to be elaborate to be useful and should try to minimize the total cost while maintaining relevancy and cost effectiveness. In manufacturing industries, costing results in a better understanding of costs, simplifies products and procedures, eliminates waste, cuts costs, reduces lead times, improves quality-added value, and increases customer satisfaction. The same strategies can be implemented in the service industry. 5) Better trading and networking Cost management helps us to effectively and efficiently deliver the services and fulfill the goals of the education system. Costing leads to the resources being used meticulously and the system flourishing. The study of Cost-Benefit analysis is essential for strategies of expansion and diversification. 6) Self-efficiency and relevancy The funding legislators and granting institutions pressure the dependent units to find ways to cut costs without reducing the quality and number of beneficiaries. Better trade-offs between the cost measurements can be worked out with the help of costing techniques and management. Making broad cuts, which is the most common approach, fails to consider the various studies of the education system. Self-financing pressures organizations to seek out activities and strategies to maintain the wasteful usage of resources which has led to unproductive results. In addition, it also looks for different sources of earnings through research, projects, consultancies, etc.

Brief Evolution & Importance of Costing

15

7) Reporting Reporting of achievements, outcomes and bottlenecks as per the standards should be emphasized. Reports, if shared, can attract useful suggestions and opinions from specialists and those with expertise. 8) Benchmarking purposes Comparisons of accounts with prestigious universities and institutions would help to bridge the gap and develop our versatility. One is able to analyse the weakness and make an attempt to improve it. 9) Opportunities to improve value Our new approach, ABC costing, actively engages every function of an organization by creating process maps and estimating resource costs. This bridges the historical divide that has often led to tensions and stalemates over cost-cutting steps. ABC builds a common information platform that will unleash innovation based on a shared understanding of the actual processes of care. The accurate knowledge of costs helps to make valuable decisions that will lead to more customers. 10) Better distribution of scarce resources and improve resource capacity utilization This approach identifies how much of each resource’s capacity is actually used to perform processes and how much is unused and idle. Managers can clearly see the quantity and cost of unused resource capacity at various levels of functions of management. Resource utilization data also reveal where increasing the supply of certain resources would ease bottlenecks, which would enable more timely care and serve more customers with only a modestly higher expenditure. When managers have better visibility into areas where substantial and expensive unused capacity exists, they can identify the root causes. Other causes of low resource utilization may also be available just in case the need arises. Escalating costs, diminishing resources, increased competition, unhappy customers, and state legislators demanding accountability pressure them to manage costs better. Costing allocates the costs per process of performing different activities so we can clearly identify the capital cost and operation cost. Operational costs are identified precisely and hence the bifurcation of fixed and variable costs aids in the optimum management of scarce resources. In some cases, understanding the actual cost of excess capacity should trigger a discussion on how to best consolidate such expenses to reduce the high costs of unused capacity and improve outcomes. For example, this would help us decide whether to opt for leasing, a rental

Chapter One

16

basis, or make our own storage provisions by expanding the existing warehouse for inventory management. 11) Eliminate unnecessary process variations and processes that don’t add value In addition to reducing process variations, every activity eliminates steps or entire processes that do not improve outcomes. It also reveals major opportunities for improvements. Comparing process maps and resource costs for various activities and resource costs across multiple sites not only determines how much of the cost difference is attributable to variations in processes but also protocols and productivity, and how many are attributable to supply service costs. For example, recognizing the nonvalue-added activities will help eliminate them or replace them with new activities at the same cost.

Scope of Costing ™ Analyze benefits for productive planning. ™ Aid and optimize timekeeping and the decision-making process for ™ ™ ™ ™ ™

pricing while increasing efficiency and standards. Improvise the performance in the core activities of the organization with the aid of SWOT analysis, Six Sigma analysis, etc. in management. Prune activities to enhance the attributes and increase the value further. Manage effective and efficient formulations of strategies, i.e. develop proactive strategies that respond to a highly turbulent and dynamic external environment. Reform with innovations to synergize the enterprise. Become more competitive in this liberalized world of globalization.

If an enterprise’s cost estimates are too high or too low, its risk aversion strategy is incorrect; it may lead to disastrous business decisions. By providing more accurate costs, the ABC system improves the decisions made regarding case mix, procedure utilization and pricing. This system also identifies the activities that need improvement. To improve the management of any activity successfully, the enterprise must understand the activity’s resource consumption, outputs and quality of performance. ABC provides information to the enterprise – from support and sustaining activities (i.e. facilities management) to primary activities (i.e. processing

Brief Evolution & Importance of Costing

17

procedures). It goes beyond acting as an accounting system to serve as a strategic management tool. Running a successful enterprise today requires diagnostic X-ray vision and dynamic resonance imaging. Within this operating environment, the ability to effectively schedule procedures is crucial to maximizing the use of expensive technology, elaborately configured facilities and highly trained personnel. To enhance or optimize operations, the enterprise should perform an activity analysis. In a nutshell, the further scope would also relate to handling the following inadequacies: 1) Focusing on awareness generation. 2) Classifying and evaluating the mechanism – activity-wise outlining the composition of resources per unit cost. 3) Sharing resources per unit as an indicator to measure progress needs greater scrutiny. 4) Critically addressing the gap pertaining to income from returns. 5) As funding from the central government is subsistence, there is an onus to search for other sources of income. 6) Not only is surveillance required but also a larger number of beneficiaries with a quality education.

Various Methods to Calculate Cost 1) Simple Calculation Total Cost Incurred for Total Intake of Materials Total Number of Intake of Materials of that Specific Year This unit cost is the ratio between total costs and total number of input/enrolments for a particular year, here the average per input is considered. This unit cost is the ratio between recurrent money costs and number of input for a particular year. Here the capital expenditures are not considered as they are considered non-significant. 2) Cost Per Average Daily Attendance Recurrent Cost Average Daily Attendance This is the average cost on daily attendance basis.

Chapter One

18

3) Capital Cost per Place Capital Cost Number of Places This formula of cost per place relates and compares the choice of investments to the annual cost per place of different projects. This is like estimating cost in light of the economic life of different projects and the appropriate cash flow at discount rate. This estimates the Comparative Advantage on Demographic basis. 4) Average Cost Per Project Recurrent Cost No. of Time/Stage Conducted for Particular Projection For this purpose, Total cost should be divided into groups of varying sizes for different types of activities or different projects. This projection is the recurrent cost divided by the number of completion stage conducted for a particular project. 5) Average Recurrent Cost Per Input Service Recurrent Cost No. of Input service This formula is mainly of interest to costing researchers and specialists because of its sensitivity to the major variable cost trends. Input service can be in time/course/stage/level by the person 6) Cost Per Output

Total Cost No. of Output

This is the ratio of total cost and the actual number of output. It is also a ratio of comparison between theoretical costs and real costs divided by the number of output after deducting the waste. This ratio indicates the average real cost and volume of economic wastage.

Brief Evolution & Importance of Costing

19

7) Cost by Level of Activity Attained This theoretical procedure outlines that cost should be generalized by considering not only the Levels of activity but also who quit the system after completing their job. This kind of precision in the estimates is necessitated by the well-established fact that those who quit the system before executing have nevertheless would be appreciated by their prospective employers. 8) Kothari Commission Method (used for Education sector) Cost per students =

௔(ଵା௥) ௧

where a = Salary of teaching staff r = Salary of administrative (non-teaching) staff t = Student and teacher ratio Here the direct operating cost consists of the salaries of both teaching and non-teaching staff divided by the student and teacher ratio, which is the ratio of the student intake to the total number of teaching staff. The example above illustrates the discounted method, which is one of the strongest methods to calculate the expected value in present tense. 9) Proposed methodology by Yaw M. Mensah for public sector institutions y 1 a 0  (a, x, t...  a n 1 y 2 )  (S , z,  ...  S rm Z m ) and y2 c 0  (b, w, t...  d s w s  b s  1 y 1 )  (r, z,  ...  rm Z m ) Where y 1 = Cost, y 2 = Outcome, x 1...x n = exogenous variables that increase cost levels; w 1 ... w s = exogenous variables to determine the outcome level and z 1 ...z m = management decision variables that affect both costs and outcome levels. Mensah suggests considering the expenditure levels and the outcomes they deliver to their stakeholders. 10) Econometrics Econometrics uses a maximum likelihood probit model, which helps in the analysis of the marginal contribution of different household characteristics on enrolment status or outcome for the youth. This model is represented as P r (y j z 0/x j ) M (x j b)

Chapter One

20

M

Where is the standard cumulative normal distribution and called the probit score or index.

x jb

is

Justification for Opting Costing Traditional costing based on volume focuses on units of particular products and applies overhead costs on the basis of direct labour hours, direct labour dollars, machine hours, and material dollars consumed in making the product. A volume-related base assumes that all applied costs have the same behaviour, i.e. the costs increase in direct relationship to the volume of the units produced. However, many costs do not behave in a volume-related manner. They are driven by diversity and complexity. The traditional method assumes that a large and growing proportion of the overhead costs is fixed whereas in this dynamic world, these fixed costs are the most variable and rapidly increasing costs. Under traditional volume- based costing systems, significant product cost distortions, crosssubsidizations and incorrect management decisions may occur. Low volume products are under-cost and high volumes are over-cost. As a result, the risk of making poor decisions increases in proportion to the level of distortion in reported costs; conventional costing may be the same if the allocation base – direct hours, direct materials, machine hours – are equally proportionate. Marginal costing predicts the cost of additional utilities obtained by the production of additional units. However, in further study, the student intake is fixed, so marginal costing is not relevant to this study. It fails to reflect the exact change and so an effective means of control cannot be achieved as it does not provide a yardstick with which to exercise control. Marginal costing is suitable when the technique ignores fixed costs when calculating the total cost. Variable costs per unit remain constant only in the short run as jobs that take longer to complete involve more overheads. Marginal costing is more useful for make-or-buy decisions, decisions to replace, comparing, choosing from alternatives, determinations of prices and sales volumes for a desired profit, and which product mix to choose for profit maximization or for earning profits. Marginal costing is a topical and complex issue within many service organizations, including universities. An example of a marginal cost is the cost of increasing class size by an additional student. The marginal cost in this instance may be the cost of the traditional course material for this student. Virtually all the costs of many service organizations appear to be fixed. Since service organizations supply all their resources in advance,

Brief Evolution & Importance of Costing

21

fluctuations in demand for individual products and activities do not influence short-term spending on resources. Absorption cost is one of the conventional techniques of ascertaining cost and is referred to as “orthodox costing”. As cost is classified in terms of behaviour and functions, it seems to remain constant even though there is a change in the level of activity from time to time. Inflation, which influences the cost of output, is negligible in such costing. The contribution per unit of the key factor of production should be determined, and if there is any lag, the contribution per unit should be again reverted towards the largest contribution margin. Decisions like whether to increase either production or sales or whether to add up to the product line or decrease it become easier. The contribution of factors in the production need to be ranked, which is not possible by using absorption costing and hence not reliable in this competitive and dynamic world. Standard costing makes comparisons with the help of standard setups and the benchmarking practices aid in price-fixing and the valuation of Business. It is more engineering-oriented than analysis-oriented. It involves the projection of cost, taking into account the variances that arise. In a larger organization, to ascertain the cost of production, which involves different materials or product mixes, would require the consideration of more expenses and clerical work. This would apply to the estimation of the cost of education but setting standards in educational institutes is not yet an issue as it is one aspect of social obligation. Process costing is applicable to the mass production of homogenous products. Though the levels of output may vary, the cost incurred is different for different processing activities. In the study of the cost of education, not all departments have the same number of courses, so the expenses incurred are higher or lower for every department. As the cost of production obtained under process costing is only an average cost, it is inaccurate and also makes the measurement of efficiency difficult. Similarly, contract costing is irrelevant as it is only related to contract work, which may be in any form. The likelihood of making mistakes is high as the costs relating to one job may be wrong in another job. Target costing is an operational management process for operating at a lower cost at the product planning stage and a strategic cost management process to reduce the total cost at the design stage. Target costing is used for multiple purposes – example, for the purpose of developing low-cost quality products that are still functionally superior to existing competitive products. Organizations differ in their perceptions of what to do with target costing. It is a tool for cost reduction and an engineering-oriented technique to harmonize strategic profit planning. Target costing works

22

Chapter One

better for high-variety and low-volume production. Target costing is not well suited for mass production. It works better in assembly-oriented industries and matrix organizations but not in process industries. For target costing to have the greatest success, it is necessary to focus on each product, with the matrix organization linking the planning, design, accounting, production, and marketing departments. Life-cycle costing measures all the important life-cycle costs incurred during the lifetime of an asset. This costing is also necessary when making decisions concerning the operation and maintenance costs incurred during the life of the asset. Life-cycle cost is usually considered at the planning and design stages of a product or piece of equipment, perhaps for a change of focus. The increased interest in disposal costs resulting from advances in technological innovations and the related shorter product lives suggest the need for a move from a design to a cost focus at the design stage to life cycle analysis at the RFO stage. This would reflect the life cycle of a student and enable one to understand how much it costs to bring a student to the point they enrol, e.g. the marketing costs of getting them there, the application processing and the enrolment of a student through to graduation. It would enable cost drivers to be introduced as a unit of measure that can readily link to performance measurement and to other cost bases, for example, cost per student or cost per student contact hour. This makes it easier to allocate costs down to course and students. It recognizes the changing cost behaviour of different activities as they grow and mature. This is a tool for enhancing performance, which is possible only after knowing the measurement bases at each stage of its existence. ABC analyses cost from the perspective of how much a particular activity costs and the number of resources consumed by the end product of the activity. With activity-based costing, the focus is on the activities that are required to produce an end product rather than assuming that the volume of the end product is the only driver of costs. ABC identifies the processes and activities involved in producing the cost object, i.e. course, program, project, or fault, and then assign costs to these activities. The costs that behave in a similar way are accumulated into cost pools, and then appropriate resource drivers are identified to assign the costs from the cost pools to the activities. The next step is to identify the activity drivers to assign the cost of these activities to the final cost object. Achieving excellence in higher education requires a critical evaluation of academic and support activities. However, public sector universities have a tradition of managing operations through the budgetary control of cost centres, e.g., faculties and departments. Financial performance is often measured by comparing the actual and the budgeted results, whereas most of the costs

Brief Evolution & Importance of Costing

23

of a particular cost centre come from the resources that have been committed in advance. This simple financial practice means university management does not have accurate knowledge of the costs of the products or services that are not provided, or the cost for the different activities that incur expense daily. Simply having accurate knowledge of how much each faculty and department within a university spends, by type of expenditure as normally reported in the financial statements, is not sufficient as it cannot reveal how much it costs to produce and deliver university products and services. With the help of ABC, universities can gauge the resources consumed by individual cost centers and customers, and by the activities and processes that deliver the product to the customers. This process will identify the true costs of producing and delivery services to the university’s customer. Based on such an understanding of linkages and relationships, a university can select the type of customer, pricing, resource allocation, and capital expenditure, and make strategic decisions regarding the student type it should target, the courses it should provide, the most suitable delivery method, and the appropriate mix and allocation of resources required to achieve strategic goals and objectives. Furthermore, ABC can be used as a tool to match the utilization of resources with faculty missions and obtain a better sense of the effectiveness of the academic staff’s time and effort differentiation within faculties and the most efficient and effective resources to meet the objective of the faculty, department and university.

Some Important Concepts Related to Costing (A) Cost: Cost is defined as “the amount of expenditure (actual or notional) incurred on or attributable to a given thing or to ascertain the cost of a given thing”. The committee on Cost Terminology of the American Accounting Association has defined cost as “the foregoing, in monetary terms, incurred or potentially to be incurred in the realization of the objective of management which may be the manufacturing of a product or rendering service”. Cost is different from value as cost is measured in terms of money, whereas value is measured in terms of the usefulness or utility of a product or service. (B) Expense: Expenses are payments that have been applied against the revenue of a particular accounting period in accordance with the principle of matching cost to revenue, e.g., the cost of goods sold against the salaries of the period in which they are incurred. (C) Cost Centre: The cost centre is the smallest segment of an activity, area, or responsibility for which costs are accumulated. Cost centres

24

Chapter One

are typically departments, but in some instances, a department may contain several cost centers. Cost centres may be classified as personal and impersonal, operation and process, production and service, and profit. (D) Cost Unit: The ICMA defines a cost unit as “a unit of quantity of product, service, or time (or a combination of these) etc., in relation to which costs may be ascertained and expressed”. Cost units denote a unique term with reference to which the costs can be ascertained and expressed. (E) Methods of Costing: The method used for the ascertainment of the cost of production differs from industry to industry. It primarily depends on the kind of manufacturing process and also on the methods of measuring departmental output and finished products. The main costing methods are job costing, contract costing, batch costing, process costing, output costing, service costing, farm costing, multiple costing, etc.

Other Types of Cost for Better Decision-Making Notional Cost The costs that are not actually incurred but considered in cost accounts are called notional costs. Such costs hamper the profitability level if not controlled within a specified time period. Programmed Cost These are costs relating to the top management decisions, i.e. longterm investment costs. They are the costs incurred in initializing new schemes for the diversification, innovation, modification, or introduction of new schemes. Differential Cost The change in total cost from one level to another level of activity is called the differential cost or incremental cost. It is the difference in the total cost between alternatives and calculated to assist decision making. Discretionary/Policy Cost The expenditure incurred for research and development is called the policy cost. These costs are of a fixed nature and incurred in accordance with certain policy decisions made by top management. Even expenditure may be incurred in excess of current requirements. These excess expenditures

Brief Evolution & Importance of Costing

25

can be verified. Here, the decisions may be with regards to investment in modifying the syllabus, innovations, or alternating courses. Marginal Cost This is the cost of one unit of product or service. The addition of one more unit will have a marginal effect and, in turn, affect the pricing decisions. Capacity Cost This is an alternative term for a fixed cost. It represents the costs of facilities for a particular period, e.g. an increase in the number of admissions. Opportunity Cost The maximum possible alternative incomes that can be earned if the resources are applied to selected alternative use; in other words, the cost of selecting one alternative by forgoing another. For example, the cost of investing in one-year regular Banking course rather than a one-year regular MBA.

CHAPTER TWO DIFFERENT METHODS OF COSTING

™ Traditional / Conventional Cost Sheet / Output Costing All costs are classified on the basis of their nature, such as materials, labour and other expenses. A further distinction should be made between direct costs and indirect costs. All of the direct costs are grouped under the headings of prime cost while indirect costs are known as Overheads. These costs are grouped under separate headings and present the cost data to the management in the form of a statement. The cost sheet is a document that presents the estimated detailed costs in respect to a cost unit. ™ Marginal and Absorption Costing Marginal costing derives the additional cost of producing additional units. It is the ascertainment of marginal costs by differentiating into fixed costs and variable costs and the effect of changes in the volume and type of output on profit. Only variable costs are considered for computing the cost of products and thus are treated as product costs. The fixed cost of products is considered for valuation. As total costs are divided, fixed costs can be controlled by the top level of management. Under absorption costing, the costs are fixed, and variables are taken into consideration. All costs are classified on their functional basis into production cost, administration cost, selling and distribution cost, etc. In today’s dynamic world, the changes in production costs are on account of changes in the volume of output and the way in which fixed costs tend to behave. The difference in the cost of production from time to time poses a problem for the management in the decision-making process. Hence, the marginal costing technique enables management to carry out its day-to-day sanctions of planning, decision making and controlling as all costs other than fixed costs are manageable marginal costs. Marginal cost is the cost of one unit of product or service that is avoided if that unit were not produced.

Different Methods of Costing

27

™ Standard Costing F.W. Taylor provided the impetus for the development of standard costing systems. Standard costing is concerned with comparing the actual cost per unit with the standard cost per unit. This is also called the standard costing variance. These variances specify what should be achieved and then measure the extent to which it is achieved as the unit cost of a product has profound implications for the firm’s competency and is thus worthy of such control and pull management. ™ Process Costing This refers to the method of accumulating the cost of production as per level of process. It is a continuous costing where goods are manufactured as a continuous process. This method is also known as average costing because the total cost of production is charged to all the units produced. It helps to calculate normal cost, abnormal cost and scrap value during the processing period. This way we can control variances occurring abnormally. ™ Target Costing Target costing is a design approach in which a company designs a product to achieve the desired profit while satisfying the customers’ expectations for quality and product features. It seeks to bridge the gap between the cost determined through market research and the cost at which the firm can supply its products without compromising its profitability. It is also applied to manage costs at the product design stage via value engineering and controls the design activities of a product using the target cost as an economic guideline. It is a structured approach for determining the cost at which a product with specified functionality and quality must be produced to generate the desired level of profitability. ™ Life Cycle Costing This is a method of calculating the total cost in which all subsequent expected costs of significance are included as well as the disposal value and any other quantifiable benefits to be derived. The LCC technique is justified whenever a decision must be made on the acquisition of an asset that will require substantial operating and maintenance costs over its life span. Four major factors – energy intensiveness, life expectancy, efficiencies, and investment cost – influence the economic feasibility of applying LCC analysis.

28

Chapter Two

™ Service Costing The cost of providing a service is known as the operating cost and the method employed to ascertain the cost of such a service is known as operating costing. This is the cost of rendering services that are intangible. Costs are computed period-wise and only when services are provided. ™ Kaizen Costing / Lean Technique Kaizen is used to encourage continuous improvements in cost reduction. It does this by targeting reductions in current unit costs and then comparing the actual reductions against these targets. Kaizen costing involves (1) cost reduction activities, and (2) cost reduction activities for each period. Generally, the direct material costs and direct labour costs are controlled through value engineering and by standard costing for each product. It is an attempt to reduce labour hours and materials by detecting unprofitable products and by reducing the costs of existing and new products. The number of employees is reduced, material costs are controlled, and water and gas usages are cut. This costing necessitates standardizing products and parts by applying value engineering to all items purchased and increasing the effectiveness of both equipment use and indirect costs. ™ ABC Costing This is an approach to costing the resources consumed by activities in order to create and deliver a product or service. This costing system assumes that cost objects create the demand for activities, which, in turn, cause resources to be consumed and so generate costs. ™ Job and Batch Costing Job costing is a distinctive method of costing as it is a specific order costing adopted to execute the work strictly according to customer specifications. The production depends on the order received from the customer. The production jobs are executed in batches to avoid huge inventory costs. This is remedial action to eliminate the defective in order to improve efficiency and also facilitate a revision of the estimates. ™ Contract Costing Costing for a contract job is usually incurred for repair, construction, projects, etc. This costing is terminated after the completion of a contract. Expenses chargeable to contracts are usually direct in nature.

Different Methods of Costing

29

™ Quality Costing The purpose of quality costing is to produce a high-quality product at a low price. It attempts to achieve this mainly by conforming with particular specifications, being more user-oriented and, overall, utilizing the innate characteristics of the essential superiority of a product or service to meet the expectations of the customers. Quality costing is carried out on a large scale where the cost of defective parts, defective goods, the large amount of testing, repairs, and warranty costs, etc. should be reduced to 2.5% of sales. Quality costing can improve the company’s profitability through more effective budgetary control, and more value-added and non-valueadded activities.

CHAPTER THREE ESTIMATION OF COST IN THE EDUCATION SYSTEM USING THE CONVENTIONAL METHOD

Introduction Education is a necessity. It is the sine qua non of civilization. All along it has been the responsibility of state and central governments to provide it, one of the basic foundations of life. In all stages of education, from primary, secondary, undergraduate and postgraduate, education economists play an important role by providing effective education at a reasonable cost. The cost of education is a neglected area though we are often concerned about the numbers and quality. The cost has become a nonissue as it is borne by the government, but now it is difficult for the government to bear all the costs as the number to be catered for is increasing day by day. Liberalization, globalization and privatization processes have questioned the government stance of subsidizing education even when some students can afford to pay for themselves. The entry of private operators into the educational system has made the economics of education a serious issue. Ultimately, the time has come when a school’s, college’s and university’s efficiency and effectiveness are judged through the cost they incur providing education. Today, a key concern for India is the creation of an employable workforce to harness its demographic dividend to the maximum extent. To achieve this, the country needs an education system that can deliver quality in terms of a skilled and industry-ready workforce without diluting the focus on world-class research-centric and innovative teaching and vocation-focused education, all of which need to be delivered at a low cost without affecting the quality and costing methodology.

Preamble of the Indian Education System: An Overview Education imparts knowledge and skills and shapes values and attitudes. Education forms the backbone of a nation and is one of the most

Estimation of Cost in the Education System Using the Conventional Method

31

important indicators of a country’s growth and development. The rise of the knowledge economy at a global level has reinforced education in all its forms as a key economic and business driver. Education acts as a driver for technological innovation and facilitates the absorption of advanced technology for the benefit of humankind. It is now widely accepted that knowledge capital is the key to a developed economy. In the ancient agrarian age of India, education was Gurukul-oriented – a traditional residential school of learning at the teacher’s home/monastery. Learning and gaining knowledge was achieved under the shade of a tree in the open air; futuring and prospering under the guidance of a guru/mentor. They imparted knowledge of Vedas, scriptures, Upanishads, medicine, warfare, statecraft, astrology, and so on. Indoor teaching was restricted to only a few courses like chemistry and physics. Vedic education included proper pronunciation, recitation, grammar, derivation, composition, the secrets of nature, and reasoning with logic. Scriptures is an exploratory learning process where teachers and students co-travel in search of the truth. Literature deals with Sanskrit literature, Pakrit, and various tests. Philosophy encompasses a rich tradition of poetry and drama based on Hindu religious texts embedded in: ™ Theistic Philosophy – related to Vidya, Dharma, doctrine of unity, culture, and correct thinking. ™ Gita’s Philosophy – related to religious culture and ethics. ™ Agnostic Philosophy – related to the theories of Buddhism and Jainism for the welfare of the society through individual reforms. Monastic orders of education under the supervision of a guru was a favoured form of education for the nobility in ancient India. Knowledge was provided to students according to their caste, which was based on occupation. To the priest class the Brahmins imparted knowledge of religion, philosophy, and other ancillary branches; the Kshatriya in the warrior class were trained in various aspects of warfare; and the Vaishya in the business class were taught tricks. The book of laws, Manusmriti, and the treatise on statecraft, Arthashastra, were the fundamental elements influencing the monastic orders of ancient education. Education involved discussing human goals according to Karma and explored the themes of human existence in the context of Dharma. There were no fixed fees, no printed books, no separate school buildings, no

32

Chapter Three

benches/chairs, no rollcall register, no annual examination, and no regular timetable1. Traditional structures made mass education a high priority. The reforms centered on literacy and training, and on restructuring the university systems, inducing vernacular education. They stressed ungraded curricula, modern textbooks and new examination systems, and appointed a number of government pandits, each in charge of looking after four to five schools. Each guru was asked to submit periodic reports and take classes according to a regular timetable. Nowadays, teaching is based on textbooks and learning is tested through a system of annual examinations. Students are asked to pay a regular fee, attend regular classes, sit on fixed seats, and obey the new rules of discipline. Only those who are willing to work with the new system and accept the new rules are supported through government grants. While India has shown impressive growth in the number of institutes and enrolments, it still faces challenges on several fronts, including low and inequitable access to higher education, a shortage of faculties, deficient infrastructures, and low-quality and inadequate research2. With the stupendous growth of the education sector, educational institutions are becoming complex organizations, confronted with managing a wide range of activities encompassing the marketing of institutes to students for admissions and corporate bodies for placements, managing internal operations, planning sophisticated financial and cash flows, and coordinating regulatory and statutory authorities, etc. In addition, educational institutes are also subject to the vagaries of market forces due to stiff competition and demanding customers. The planning committee recognizes the challenges facing India’s higher education system and proposes several initiatives to resolve these; for example, through increased funding for disadvantaged groups, the deployment of cutting-edge technologies, faculty development programmes, improved governance structures, and the provision of incentives for research. India’s higher education system can be expected to be better aligned to industry and global practices, and be more transparent and inclusive, provided the government is able to create an enabling regulatory environment and put in place robust implementation, monitoring and quality assurance mechanisms in the sector3. The social rates of return on investments in all levels of education much exceed the long-term opportunity cost of returns. At the same time, since it is difficult to 1

www.countrystudies.us/india/37; India –Education. Ernst & Young Pvt. Ltd., Higher Education in India. 3 Executive summary, Higher Education in India, 12th Five-year Plan and beyond. 2

Estimation of Cost in the Education System Using the Conventional Method

33

measure the social rate of returns, the financial ROI and study of cost management become key drivers for sustaining and enhancing the investments in the education sector. India has the third-largest higher education system in the world after China and the United States, and ranks second in the world in terms of student enrolment, with 25.9 million students enrolled in more than 45,000 degrees; yet India’s GER of 16% was much below the world average of 27% in 2010. According to UNESCO: Global Education Digest 2011, India has 25.0 million enrolments with a GER at 17.9% compared to the USA with 19.1 million enrolments at 95% GER and China’s 29.3 million at 26% GER. India has witnessed a particularly high growth in the last decade, with student enrolments increasing at a CAGR of 10.8% and institutions at a CAGR of 9%. Kerala is still in first place in the overall literacy rate with 93.9 per cent, out of which 96% are males and 92% are females. The ranking is followed by Lakshadweep in second place and Mizoram in third. At the end of the 11th plan, there were 659 university and universitylevel institutes, which included 152 central institutions, 316 state institutions, 191 private deemed universities, and 33,023 university colleges, which makes a total of 33,682 educational institutions. Central universities make up only 8.55% whereas state universities make up around 55.04% in the total number of universities,4 which is partly driven by increased corporate sector participation. Out of the total universities, 54% are multidisciplinary, 63% women and open universities, and the rest are disciplinespecific – agriculture, engineering, law, medical, etc. Andhra Pradesh, Gujarat, Karnataka, Maharashtra, Rajasthan, Tamil Nadu, and Uttar Pradesh possess 21 or more state universities; Uttar Pradesh and Delhi have the most central universities. The student-teacher ratio is currently 26:1, a little higher than the 22:1 in the previous decade. The private sector has played an instrumental role in this growth, with private institutions now accounting for 64% of the total number of institutions and 59% of enrolments in the country. Private universities are mostly located at Rajasthan, followed by Gujarat5. The number of private institutions grew at a CABR of 10%. This growth included the establishment of more than 98 state private universities, 17 private deemed universities, and 7818 private colleges. Private institutions grew at CABR 10.3% and 4

Sources: EY-Edge 2009: Private enterprise in Higher education; UGC: Annual Report 2005-06; MHRD: Annual Report 2007. UNESCO: Global Education Digest 2009. 5 UGC Report: Higher Education in India – Strategies and Schemes during 11th Plan Period (2007-2012) for Universities and Colleges.

34

Chapter Three

government institutions at CABR 8.3%. The share of unaided private higher education institutions has increased to 63.21% of the total institutions. There has been a greater diversification in disciplines and courses, with the introduction of specific research areas in foreign languages, yoga, dairy, economics, politics, fisheries, armament technology, population, science, social science, and rural studies. This growth is reflected in the dominant share of unaided private higher education institutions in professional courses like medicine, management, computer applications. General courses account for the largest share of enrolments, but professional courses are growing significantly faster. The enrolment is 14.3 million in 16,250 general institutions, excluding “other” courses. There are 9701 professional institutions, in which 7.1 million students are enrolled. In higher education, 16.2 million are enrolled in undergraduate degrees, i.e. 87.4% of the total enrolment; postgraduate enrolment is 2.2 million – 12.1%, and a mere 0.1 million, which is 0.5%, are doing a PhD. The unaided private sector accounted for around 60% of the total enrolments in 2012, almost double that of 2001, which was 33%. Enrolment in professional courses has witnessed a higher growth – at the rate of CAGR 20.6%, from 2.8 million to 7.1 million – than general courses in the last five years. Enrolment in private institutions has increased at a CAGR of 11% over the last five years compared to 7% in government institutions6. The percentage of students enrolled in unaided private higher education institutions has also increased considerably, to 51.53%. The number of doctoral students has not kept pace with the overall growth of students in higher education, however, and the overall quality of doctoral studies in many institutes is not high. Less than 1% of the total students who are enrolled in higher education are pursuing PhDs; at the rate CAGR of 14%, the ratio of the number of students pursuing a PhD to the total population in higher education shows a declining slope. Most of the PhDs are being pursued in the science and social science streams and fewer in engineering. Education has become more available not only due to regular courses but also correspondence courses, distance education, where student enrolment has increased to 9 per cent, scholarships, loans, education schemes, specific vocational education, and training institutes. During the 11th plan, significant progress was made in the areas of expansion, inclusion, quality improvement, and increased private participation through initiatives like overcoming faculty shortages, reforms

6

Twelfth Five-year Plan: Chapter on Higher Education, UGC.

Estimation of Cost in the Education System Using the Conventional Method

35

in curricula, infrastructure development, and strengthening research and development activities. The government has set a target of enrolment of 35.9 million students, an annual growth rate of 7%, by the end of the 12th five-year plan. As per the target, central higher education institutions are expected to show the highest growth of the 14.9% in student enrolments, which account for the lion’s share of enrolment at 52%, and these are expected to grow faster than private ones. The focus would be on achieving quality and equity. Significant progress has been made in recent years not only in the development and strengthening of higher education in terms of improved student access, strengthened research and postgraduate programmes, more equitable representation of different social groups, renewed curricula, but also in enhanced institutional management and strategic planning capacity. The higher education system has been experimenting with management approaches to deal with the challenges arising from internal factors, such as changes in academic disciplines and new instructional methods, and external factors such as population growth, diverse clientele and changing labour market requirements. As of 2020, only 32.2% (159) of the total number of Indian universities and 13.1% (4094) of the colleges in the country have been accredited by the National Assessment and Accreditation Council (NAAC). As of March 2010, NAAC had rated 62% of the universities and 90% of colleges as average or below average on specified quantity parameters. Higher education institutions face an acute problem in terms of lack of academic and physical infrastructure. The UGC recognized 48.26% universities and 68.58% colleges, i.e. 153 universities and 9875 colleges, respectively, with infrastructure deficiencies during the 11th five-year plan. In pursuit of better-quality education, an increasing number of Indian students, with a growth rate of 24.5%, are studying abroad, which accounts for a 46% GDP value loss to our country. In the U21 Ranking of National Higher Education Systems, out of the 48 countries, India ranks last at 34.4 points, compared to 100 points for the USA and 77.8 points for Australia. Even Brazil and China are ahead of India. In the QS World University Rankings 2011–12, only two Indian higher education brands were included in the list of the top 500 global universities. Though there has been an overall increase in literacy rate, gross and annual enrolment rate, and the number of institutions, the quality and competency standards are very low when compared globally. As per the recent Nasscom – McKinsey Industry reports, only 25% of technical graduates and 10–15% of other graduates are considered employable by the IT/ITES industries. According to a survey conducted

36

Chapter Three

among 800 MBA students across different cities in India, only 23% are employable.

Financing Higher Education It can be seen from the CABE report that expenditure on higher education, including technical education, reached 0.6 of the GDP, which is 10.7% of the total outlay. The total expenditure for education for all departments works out to be only 3.72% of GDP, of which higher education is only 1.22% of GDP7. The central government finances 67% of higher education and the state government only 33%. The source of income for education institutes is usually student fees, hostel fees, endowment fees, canteen fees, etc. The total expenditure on the revenue account at the all-India level during 2005-06 was 28.33% of the total GNP, and only 3.01% of the GDP was provided for the budgets of the education departments. According to the National Knowledge Commission, fees constitute less than 15% of the total revenue of Indian universities. The proportion of fees in the income of higher education institutes declined from 37% in 1950-51 to 12% in 1986-87 while the share of government financing rose to 76%. The majority of higher education institutes (HEI) indicated that research and consultancy account for less than 20% of the total fund flow, with many deriving nil revenues from this source. HEIs were also lax about utilizing the assets they owned and encouraging endowments for financing operations. Our survey indicates that private institutions depend largely (59%) on student fees, whereas public institutions hardly depend (11%) on student fees. Public institutes depend on government grants for about 80% of their income. Fees are low in major central universities and high for most professional courses. The central government expenditure on higher education has increased rapidly from 29.6% to 196.2% of total expenditure, of which 38% is for general higher education, 28% for technical higher education, and 17% each for agricultural and medical education. Even state expenditure has increased but at a slower pace of 13.2% to reach 137.1%. Central plan expenditure is 113.2% of the total expenditure, and nonplan is 83% of the total expenditure. State plan expenditure is just 21.8% and for non-plan 115.2% of the total state expenditure. The central government supports 58% of the technical education while the state government accounts for 74% of the operating costs of general 7

FICCI, Planning Commission Reports: Higher education in India: 12th Five- year plan & beyond; FICCI Higher Education Summit 2012.

Estimation of Cost in the Education System Using the Conventional Method

37

education. However, the central government expenditure on general higher education has increased rapidly, with a substantial increase of 39.6% on planned expenditure and 37.5% on non-plan expenditure, for a 38.3% increase of total expenditure at 77.1%. Central government expenditure on technical education has increased to 35.3% on plan expenditure and 18.9% on non-plan expenditure for a total of 54.2% expenditure at a pace of 35.6%. On the other hand, state government expenditure has grown at 12.5% per year, which involved 11% plan expenditure and 97.7% non-plan expenditure of the total 108.7% expenditure. Expenditure on technical education has increased 15.8% faster, with 10.8% plan expenditure and 17.6% non-plan expenditure of the total 28.4% state government expenditure. Public expenditure is 6% in higher education to total plan allocation, which is 10.72% of the total outlay for education allocated in the budget. Plan Expenditure ™ Expenditure on programmes/projects and schemes that leads to additions or extensions in the capacity of existing institutions. ™ Expenditure on all new plan proposals. ™ Investment outlays to improve the productivity/performance level of the existing capital stock. ™ Investment to replace worn out capital. ™ Seminars and conferences which lead to networking with other institutes. ™ Workshops to enhance knowledge, skills, aptitudes, etc. Non-Plan Expenditure ™ All expenditure connected with the maintenance of existing institutions and establishments, i.e. operating expenditure. ™ All expenditure for continuing services and activities, i.e. salaries, honorariums, etc. Expenditure in terms of scholarships for higher and technical education as a percentage of total expenditure declined by 0.17% in 2003-04 from 0.22% in 1990-91– 23% of total universities do not provide scholarships while 56% universities provide only 10%. Differential fees from international students is a very popular cost-recovery measure abroad because higher fees are paid by foreign students. Multi-layered funding strategy will focus on the following key elements:

38

Chapter Three

1. Provide special funding for backward areas as well as up-andcoming colleges and universities. 2. Identify colleges and universities with potential and fund them so they can attain excellence in teaching and research with greater academic, administrative and financial flexibility. 3. Cultivate and support a credit-based “cafeteria” approach to education, especially in autonomous colleges as well as colleges and universities with the potential for excellence. Intensify fundamental education and fortify it with added on-utility specialization. 4. Promote the effective clubbing of open and conventional systems to address the increasing demand for higher education. 5. Propagate the parallel education concept to obtain a degree and diploma or a dual degree in purely conventional or clubbed open and conventional systems. 6. Create an information flow between colleges and universities. 7. Promote the creation and effective use of multimedia to supplement classroom and laboratory teaching. 8. Create institutions, in collaboration with research laboratories, to promote integrated five-year teaching in science disciplines with an inherent research component. Strengthen individual research and support activities that create an atmosphere for research. 9. Pursue skill development for teachers. 10. Reward innovativeness in teaching and research. 11. Identify and support institutions for focused research and traditional and emerging interdisciplinary subjects. 12. Support outreach activities. 13. Develop an ambience and cultural for professional management of higher education institutions through the use of computer and training of administrators. 14. Promote internationalization and faculty-interchange under higher education. 15. Give incentives for academic, administrative and financial reforms. 16. Encourage resource mobilization.

Statement of Problem: Changing Pattern of Funding Financial assistance is provided for human resources, equipment, books and journals, seminars, conferences, renovations/alterations and upgrading existing buildings, work expenses, and travel. In addition, departments are also provided with matching grants as an incentive for

Estimation of Cost in the Education System Using the Conventional Method

39

resource mobilization, support for international collaboration, exposure for students and also organize different events within the institutes to enrich their competencies. However, central as well as state resources to finance higher education are shrinking, which has created a wide expenditure and investment gap between the resources required and the resources available. An inevitable consequence of the high and increasing investment gap is that market forces are guiding the developments in higher education, resulting in high cost-sharing with the students. Privatization and, still worse, commercial practices are guiding the present developments in higher education. Total plan expenditure in university and higher education was at its highest in the 5th plan at 28%. It fell continuously until the 9th plan period, reaching a mere 9%. We can observe a uniform pattern of deceleration of public expenditure in higher education across all states. The pattern of public expenditure in higher education constitutes two important phases – a growth phase and a declining phase. The high growth phase in public expenditure lasted from 1951 to 1980. During this phase, the central government’s plan and non-plan expenditure grew to 17% while the state plan and non-plan expenditure grew to 15%. Thereafter, there was a low-growth phase during which the central government’s plan and non-plan expenditure declined to 10% while the state government’s plan and non-plan expenditure declined to 11%. The central government’s declining share is an important reason for the deceleration in the public funding of higher education. This led to fiscal shortages that widened the investment gap to improve the quality of higher education. Plan and nonplan support of universities and other higher education institutes by the central and state governments taken together between 2002 and 2005 indicates that the public expenditure per student in higher education fell drastically to Rs.7237 from Rs.10302 in 2002-03. The UGC (University Grant Commission) is the major recipient and spender of planned resources for university and higher education. Almost 79% of resources are allocated under the UGC. This is further subsidized for three main reasons:

™ The decline in the public sector contribution to GDP and the

consequent increase in the growth of the private sector contribution. ™ The decline in the growth of taxation as a source of financing in public expenditure. ™ The crowding-out of higher education, i.e. enrolment of fewer students in higher education.

40

Chapter Three

Therefore, to face the hard reality of the decrease in the public financing of higher education, it would be appropriate to face the challenges by shifting the strategies of planning and financing of higher education towards diversified sources of financing. This shift is necessary in view of quality and equity as uncontrolled or excess privatization would lead to a further deterioration in quality. The recurring expenditure on education in the year 2015 was around Rs.1,80,000 crores and the capital expenditure Rs.88,900 crores. This is based on population projections for the year 2015 and working on the basis that the goals of an education policy are to universalize education for the age group 5–14 and achieve a 75% enrolment rate in higher secondary (age group 15–19) and a 20% enrolment in colleges and professional education (age group 20–24). The projected expenditure on education to meet the above goals worked out to be three times the current expenditure. The government’s share would amount to Rs.117,099 crores. At a projected growth rate of 8% GDP, the total education expenditure would be 3.15% of the GNP after 2020. The public expenditure would account for 1.98% of the GNP. The total population that would achieve a tertiary education would be between 5.6% and 9.8%, depending on a GDP growth rate of 6% to 10% per year, respectively. The total number of teachers in all sectors would have to be more than double from the existing 49.25% to a range between 93.47% and 119.15 %. There is thus a great need to close the investment gap in a manner that the commercial expansion of higher education stops, and quality higher education is provided to the many students seeking higher education. Diversified sources of financing and funding mechanisms should be found so that students entering higher education are not denied a quality education. The challenge arises in terms of finding diversified sources of financing and allocating the resources efficiently to meet the objectives of access, equity and quality higher education. Education is the fundamental right of every individual to enhance their thinking skills and rational behaviour and meet their surrounding obligations by making authentic and accurate decisions. The only position of the government towards education is to spend enormously to educate all the citizens of India with the least accountability of resources – in terms of money, human, equipment-in-aid, etc. There is almost no consideration for cost-effectiveness in this sector. We can’t measure the intangible output of education system as it differs from person to person, but now there is a need to analyse cost-effectiveness to increase the efficiency of institutes so they can survive in this competitive time when private institutes dominate

Estimation of Cost in the Education System Using the Conventional Method

41

the field. Therefore, it is essential to manage the quality of education within the scope of the mentioned parameters of financing. As grants are also subsidizing, there is a need to study the effective utilization of resources in this education system. This is possible only by costing the inputs in the education system. Education in ancient India was Gurukul-oriented – under the shade of tree learning and gaining knowledge from a mentor, the guru. What was the cost of education at that time? Hardly anything – the cost of food, clothing, and other requisite accessories, like a bow and arrow and rudrakshas for self-adherence or for chanting mantras. Any other cost was borne by the king of that particular kingdom. In the 19th century, a new education system was initiated in Indian style by Shri Rabindranath Tagore in Shantiniketan – under the Susan of trees, in the natural air. The cost was very low as the cost of living was low. The economic factor – the macro analysis – also has an impact on the education system. These are non-controllable factors that also affect cost. With liberalization and globalization, the education system has become more expensive. With the emerging demand for education, a vital element for survival in this competitive world, cost analysis is a fundamental concept. Education is no longer the preserve of society’s elite but has become a universal right, a high priority in welfare budgets. Educational reforms were made in the National Policy on Education 1986, which put greater emphasis on the “universalization” concept in the education system and on the improvement of the quality of public education. In further reforms, Shri Rajiv Gandhi, an innovator of the education system and enthralled by the role of advanced technology and governance, enhanced the efficiency of the education system. This plethora was the situation when globalization took hold. In the 1996 manifesto, the Congress Party introduced a lunch programme to improve nutrition and increase school attendance. In 1998, the trumpet of “Shiksha, Swasthya Aur Suraksha” signalled a revolution in education. The policy emphasizes that universities should move forward into innovative teaching and research. The future thrust of reform will be on the greater autonomy of colleges and departments to administer and manage themselves and to interact across the boundaries of institutions and funding agencies. The major focus is on the improvement of efficiency in infrastructure, academic resources, and so on. In an effort to inculcate the values of universal and liberal education, there was a major funding and reimbursement drive by the central government. The outlaid allocation is funded to the state governments and the UGC to provide grants, special grants for procuring capital assets,

42

Chapter Three

maintenance, repairs, and so on, and subsidies in the form of fewer fees, providing facilities, etc. There is a sharing of the cost between central, state and local universities. The UGC is the top body for funding the education system. The sources of income for local universities are the receipts from students in the form of endowments, fees for providing education, income from the sale of books, income from hostels located within the campus of universities, and the meals, while students receive scholarships, stipends and other financial assistance. The actual cost is estimated by deducting these receipts from the overall cost. Initially, the central government financed 50% of the total cost; 8% came from fees and endowments and 42% from local rates. Gradually there was a fall in the yield of fees and endowments due to the expansion of university grants. By 1965, fees and endowments were just 4%, including payment for school meals, and grants simultaneously increased. In 2009-10 the budget outlay was Rs. 44,528 crores but the total government expenditure increased from 0.31% to 0.57%. The total public expenditure has increased by nearly 50% from Rs. 89,732 crores in 2003-04 to Rs. 134,274 crores in 2006-07. There is an urgent need to reprioritize expenditure and tighten fiscal discipline. As expenditures expanded enormously, the commission introduced rigidity into its policies and many measures to control unrelated and irrelevant spending. The commission subsidized the grants to the state’s local universities. Even the government is turning to austerity to control costs and further decrease the gap. Kerala is one of the best examples of keeping its autonomous status by being funded the least by the central government. Therefore, autonomously financing expenditure in education has become significant. There is a need for reconnaissance in education as a way of implementing methods of financial controls. John Vaizey, a socialist economist, also supports replacing financial control with cost accountancy as a method of preventing wasteful expenditure and the speculation of public funds. The education secretary of Harrisburg also elaborated on the outcome of costing. He deliberately mentioned that costing validated the historic investments in public education, which had been long overdue, that resulted in more efficient and effective productivity as a larger number of students were covered. Because of costing’s innovative approach, there were adequate and equitable funds and resources to educate larger masses. One report of a survey conducted on costing details that it is up to state

Estimation of Cost in the Education System Using the Conventional Method

43

and local university policymakers to determine the appropriate partnership between state and local funding to arrive at those targets. The policy implications affect the allocation of costs of education, and effective planning improves the quality and efficiency of education, which is necessary to survive in this competitive world. Costing exercises focus mainly on the cost of achieving intermediate indicators rather than the final targets. Only when we know the cost of the system can we analyse the benefit with accuracy. Cost is a fact whereas pricing is a policy. Only after an accurate analysis of cost can we fix our margin at a competitive rate. Costing is one of the mechanisms used to minimize the internal hurdles and adapt them into more useful resources to gain economic value. Such mechanisms portray the performance of financial elements, which indirectly helps us measure the non-financial elements and consequently control and mould the unproductive ones by way of innovation, modification, introduction or inclusion. There is a need for more analysis of indirect and non-monetary benefits as they may not contribute to the efficiency of the education process. These costs can be reduced or, if unnecessarily indulgent, eliminated. There is also a need for sensitivity analysis of direct and indirect costs of teaching and nonteaching in monetary and non-monetary terms to estimate cost as well as assist in planning, controlling, evaluating, and implementing the optimum use of resources in the education system. The application of costing will help to increase our self-efficiency for further fostering and adherence. This may reduce the burden from the funding agencies as we become strong enough to finance ourselves by using various strategies. The application of costing is crucial as the grants from donors are harder to come by, and hence self-independence is a requisite. Thus, estimating costs to estimate capacity, efficiency, and, in turn, the affordability of independent and autonomous operations and financing is crucial. This is data for human resources to use in planning, managing, performing, and organizing. This information would act as input for organizers to control the financial aspects.

Review of Literature i) Report of The Edwatch Reality – Rhetoric vs Reality The State of Elementary Education in India, 2008, clearly highlights the gaps, irregularities and some critiques in the Comptroller and Auditor General Report on SSA. The share of central government expenditure on social services increased from 11% in 2001-02 to 16.4% in 2007-08. The

44

Chapter Three

report criticizes the mismanagement of funds as the resources are not reaching the targeted beneficiaries below the poverty line. ii) Draft Report of “Working Group on Higher Education – 11th FiveYear Plan” In normal terms, the public expenditure per student in elementary, secondary and higher education was Rs.2162, Rs.6852 and Rs.12,518, respectively in 2003-04. The sectoral allocation of public expenditure on secondary and higher education has increased by 30% and 12%, respectively. For the Xth plan, the total planned allocation of Rs. 4176.5 crs was funded by the UGC. Hence, there is a need to reverse the trend and become self-sufficient by finding other resources that could contribute to the networking of the institution with industries, government, business leaders, etc., without affecting the quality of education. iii) Report of the Planning Commission – All India 1991-2000 11) Expenditure on Education: Total India 12) Government Endowment – 78,657,017 13) University Fund – 10,975 14) Fees – 3,342,663 15) Local Body – 9,317,477 16) Funds from other Sources – 2,860,381 17) Per cent of Education Expenditure on Education Department to Total Budget – 11.5% The real average per capita expenditure on education in rural India by the central government is just 2.5% of the total expenditure. There is a further emphasis on envisaging different ways to mobilize financial resources to create value addition, like mobilizing donations, increasing fees at the higher level of education, effecting savings through an efficient delivery system and levying a cess or surcharge on user agencies without burdening the various stakeholders. These measures would not only reduce the burden on government resources but also create an environment of responsibility and accountability within the education system. iv) Report by the Expert Group to review the methodology for estimation of the poverty line and how the poverty line affects the number of literates. v) How to Cut Office Costs by Harold H. Longman specifies strengthening budgetary control for worthwhile targets and making improvements instead of setting easy targets. There is an urge to break Parkinson’s Law and decentralize delegations. vi) Life Cycle Costs in Education: Operations and Maintenance Considered by Moussatche, Languell-Urquhart and Woodson. The carpet area is divided into hard flooring, resilient flooring and soft flooring –

Estimation of Cost in the Education System Using the Conventional Method

45

construction, performance, cleaning procedures, repair, maintenance, and the replacement of building materials are also considered for analysis. Life cycle cost analysis evaluates the true service life cost of the material; these costs include initial outlay, replacement, installation, and operation and maintenance costs. vii) Integrated Cost Management by Michiharer Sakurai In 1993 Japan operated 60% of the global robot production, and while the USA operated only 8%, its operating cost was lower. Prof. Sakurai provides a thorough discussion of advanced costing techniques like TQM, target costing, ABM, and ABC and also integrates one or two techniques for better outcomes with regard to overhead management and investment in computer integrated management. In addition, he offers a penetrating study of cost management for software. viii) The Design of Activity-Based Cost Systems by R. Cooper ABC is a methodology that measures the cost and performance of activities, resources and cost objects. This information can be used for setting strategies in terms of product and market segments. The concept of activity hierarchies, activity-based management cross models and the distinction between consumption models and spending models act as the controlling perspective of ABM. ix) Activity-Based Costing – The Performance Breakthrough by Peter B. B. Turney Turney maintains that ABC supports cost reduction efforts in two ways – first, it helps find opportunities with the greatest cost reduction potential. Second, ABC is a navigational aid that helps quantify the size of the hidden rocks and pick the biggest ones as cost reduction targets. He stresses restructuring the cost system stepping up the conventional method of accounting. x) Activity-Based Costing – In Support of Value-Based Management by Julie Marbbeerley Value in this context is defined as the long-term worth of the organization. Value-based management within an organization requires a full understanding of how all the resources add value to the corporation; resources include capital, technology and staff. In financial institutions, a significant proportion of the resources are used to support the infrastructure of the organization: regulatory compliance, risk management, technology, finance, and human resource management. These areas are often called the overheads, and this is where value can be enhanced or diluted easily. ABC concentrates on the analysis of activities and reviews overhead costs by means of cost management within the overhead function.

46

Chapter Three

xi) Activity-Based Costing – in hospitals ABC is the collection of financial and non-financial data about an enterprise’s activities for two primary purposes: First, costing the enterprise’s cost objects, and second, providing information for effective cost management through ABC. xii) Tapping the Full Potential of ABC by Joseph A. Ness and Thomas G. Cucuzza When ABC is woven into critical management systems, it can serve as a powerful tool for continuously rethinking and dramatically improving not only products and services but also processes and market strategies. xiii) Costing for Management by S.K. Bhatta and John Dearden There are three principles to cost management: 1) Product costing and inventory valuation 2) Decision support 3) Cost control and reduction xiv) Costing Methodology – For Use Within Australian Higher Education Institutions by Steve Robertson and Geoff Applebee The authors have divided activities into categories of teaching, research, enterprise professional development and developing new subjects; and the activity drivers are teaching hours, research hours, training hours, and the number of new subjects developed. Using ABC, managers can create a “cost assignment” view of their business. Process analysis allows a process view of a business. Together these two analytical tools provide the fundamentals for managing the resources critically. xv) Activity-Based Management in Higher Management: Can It Work? by Dr. Noor Azizi Ismail, A case study of a Malaysian university. Dr Ismail used ABC to identify how faculty spend their time by activity area and the funds allocated by their activity. The first stage of the faculty ABC model allocates costs that are within the control of the faculty. The largest of these is faculty salaries and allowances. The second stage adds university costs that benefit all faculties. While many departments or centres provide a variety of services to faculties, this study focuses only on three departments/centres that contribute most to the faculty – the academic affairs department, computer center, and practicum centre. xvi) Activity-Based Costing – For Higher Education Institutions by Lakshmi Tatikonda (Cma) and Rao Tatikanda (Cfpim) London University costs are classified as instruction costs under direct cost and non-instruction costs, such as computer use, facility use, instructional service use, and student service use, under indirect cost. These cost objects are allocated as per the cost driver, which are the faculty, credit hours, and

Estimation of Cost in the Education System Using the Conventional Method

47

the number of students. These achieved cost pools are further allocated as per the number of courses to derive the cost of the degree. This is a tradeoff between the cost of measurements and the costs of errors from inaccurate data. The authors stress that ABC could potentially free up public resources to flow into scholarships and grants for needy students rather than into inefficient programs and curricula.

Cost Accounting System for the Education System BOOKS OF ACCOUNTS

Prime Costs: 1.SALARY Teaching staff Contract staff Visiting faculties. 2.SPECIFIC LAB. 3.REPAIRS & MAINTENANCE of fixed assets & capital assets. 4.ROYALTY FEES. 5.STUDY MATERIALS & STATIONARY.

No. of students

Service Costs: 1.COMPUTER. 2.LABORATORY. 3.LIBRARY. 4.HEALTH CENTRE. 5.SPORTS

Administration Overheads: 1.AUDIT FEES. 2.PRINTING & STATIONERY. 3.ADVERTISEMENTS. 4.BOOKS & PERIODICALS. 5.ELECTRICITY CHARGES. 6.FUEL. 7.POSTAGE & TELECOM. 8.INSURANCE CHARGES. 9.SEMINAR & CONFERENCE. 10.VEHICLE MAINTENANCE. 11.TRAVELLING & CONVEYANCE. 12.SECURITY CHARGES. 13.NON-TEACHING & SUPERVISOR’S SALARY. 14.PROFESSIONAL FEES/TAX. 15.MISCELLANEOUS.

BASIS OF ALLOCATION No. of Hostel Student-Faculty students ratio

Supporting Services: 1.TRANSPORT. 2.HOSTEL & MESS. 3.CANTEEN. 4.ANY OTHER REGULAR FACILITY.

Floor area

Figure 3.1: Cost Accounting System: For Recording and Reporting Purposes for the Education System

Chapter Three

48

Types of data collected for the study: The main secondary data consists of: 1) Salary details of permanent teaching and non-teaching staff of university from the accounts section. 2) Salary details of contract teaching and non-teaching staff of university from the contractor. 3) The budget estimate of the university. 4) Annual reports of the university. 5) Data from scholarship section, academic section, DPAR, etc. 6) NAAC reports. 7) Tax details from municipal corporations. 8) Security agency for details regarding employees on a contract basis. 9) Building details from the building department. 10) Interaction with some cost accountants and versatile professors in this field. 11) References of costing analysed in hospitals and also on the environment. 12) References of cost analysis for planners by UNESCO and UNO publications. Sources of data In the university: The sources of data consist of secondary data being collected from the Accounts section, Academic section, Scholarship section, DPAR section, NAAC (Nation Academy of Accreditation Council) office, Building Department, SC-ST Cell/Category-I Cell, Examination Department and almost all offices in the university, and the Municipal Corporation, Dharwad, with regards to the research. In Delhi: NCERT, National University of Educational Planning and Administration (NUEPA), International School of Studies, Jawaharlal Nehru University, Delhi University, Amity University, Institute of Cost and Works Accountant of India in Delhi, for information relating to the study of costing methods in the education system. In Mumbai: British Council Library, institute of Cost and Works Accountant of India, Mumbai University, Somaiya School of Management. In Bangalore: British Council Library, Bangalore University, Indian Institute of Bangalore, ISEC (Institute for Social and Economic Council), Institute of Cost and Works Accountant of India (Bangalore Branch).

Estimation of Cost in the Education System Using the Conventional Method

49

Sample of the study This is the case study of one university in Karnataka, India, which has 51 departments within the campus. This study specifies only 46 subject departments within the campus of university and 5 PG centres only off campus. The Microbiology and Bio-technology Department accounts are merged. Similarly, Commerce with Company Secretaryship, Anthropology with the International Diploma in Reproductive Health Department, and the Master’s in International Business with the MBA department until 2009. About the University This state university was established in 1958. It is located in an urban area, and its main campus area is spread over 752 acres of land, i.e. 3047391 sq. mtrs. Five PG centres, namely Belgaum, Haveri, Bijapur, Karwar, and Gadag, are centralized under this university. During 2011, Belgaum and Bijapur became independent universities. In all, 227 Arts, Science, Commerce and BBA colleges, 20 Law colleges, 25 colleges providing BCA courses, 64 colleges providing education courses, 5 management colleges and 21 other colleges providing a general education are affiliated to the university. There are also five constituent colleges affiliated to this university. The teaching staff number 225, out of which the majority hold PhDs. The university has ongoing major projects which are funded by the UGC, Department of Science and Technology (DST), Board of Research in Nuclear Sciences (BRNS), National Council of Educational Research and Training (NCERT), Council for Scientific and Industrial Research, and the Indian Council of Historical Research (ICHR to the amount of around 8,06,25,033 crores. Department projects amount to Rs. 12,97,98,000 in all. Even the library, where UN and World Bank collections are available to the students, is well equipped. The books in the main library are worth Rs. 26,06,823. Browsing, reprography, bibliographic compilations, digitalization of resources, inter-library loans, computer and printing services are also provided. In addition, the library possesses einformation resources like DVDs, UGC-Inflibnet database, online journals, AV resources, etc. The university also provides student support facilities like hostels, canteens, scholarships, loan facilities and a few coaching services, like for preparing for IAS/KAS exam, entrance exams, etc. The university conducts various seminars and workshops so students can gain practical

50

Chapter Three

knowledge, conferences for the students to obtain external exposure to knowledge, and also helps with networking. The university is headed by a vice-chancellor, under whom two registrars (academic and evaluation) lead the hierarchy. The next is the finance officer and then the director of each university department. Table 3.1 Profile of University PARTICULARS Age of the University No. of Teaching Departments No. of Sanctioned Faculty Positions Per University No. of Filled Faculty Positions No. of Faculty Members with a PhD Degree No. of Faculty Members Without a PhD Degree No. of Average Teachers Per Department Per University No. of Books in Library

FOR UNIVERSITY 54 50 2091

BENCHMARK

1104 987

329 -----

197

432

28

-----

2,606,823

352,886

51 34 432

Constraints of the study Due to the lack of an MIS system in the university, many problems were faced during data collection, especially with regards to the accounting methods and building costs, which were constraints. The university provided the financial data of the years 2003 to 2010 and 2014 to assess and study the cost behaviour and ultimately estimate the cost. The departments, like the Kanaka, Basavanna and Ambedkar studies, the Vivekananda studies, and International Reproductive Health Management, are managed by major departments within which a few professors are assigned this additional job. There is no proper information regarding this either. All electricity and water costs are included in the general administration expenses; all hostels expenditures and building values are not separated according to department even though each department has different carpeted areas and land. The year does not matter for the application of the costing method to understand the cost behaviour for estimation of cost. Only the information in one year – 2014 – was used to estimate the cost of education using the traditional/conventional method.

Estimation of Cost in the Education System Using the Conventional Method

Methodology Traditional/conventional costing

Figure 3.2 For Tabulation and Analysis Purposes

51

52

Chapter Three

Under the traditional costing system, the valuation of inventory is done on a total cost basis covering all direct and indirect expenses. The total expenses are recovered from the products using a common denominator without appreciating the cause and effect relationship between activities performed on the products and the resources consumed. This has resulted, to a considerable extent, in the cross-subsidizing of expenditure between various products. All costs are classified on the basis of their nature, such as materials, labour, and other expenses. A further distinction should be made between direct costs and indirect costs. All the direct costs are grouped under the headings of prime cost, and indirect costs are known as net heads. All these costs are grouped under separate heads and present the cost data to the management in the form of a statement. A cost sheet is a document that provides for the presentation of the estimated detailed cost in respect to a cost unit. Methodology used in a traditional cost sheet Table 3.2 Resource Allocation Resource Direct Cost Indirect Cost

Service Cost Administration Cost

Students Support Service

ACTIVITY Permanent teaching staff salary Permanent teaching administration & other expenses Contract basis i) Teaching ii) Non-teaching Computer Library Laboratory

Cost Drivers No. of courses offered by each department

Cost Object No. of students enrolled for each department

No. of PG departments

No. of total students

Administration Study tour/field work/conferences/workshops Scholarship only for 2014 All Indirect costs

Estimation of Cost in the Education System Using the Conventional Method

53

Activity: These are the activities that come under the activity cost pool, which is all the costs incurred in executing the number of courses offered by each department, which are the cost drivers. Cost Objects: In this study, the cost objects are the number of students enrolled in each department. Direct Fixed Cost: These are the salaries of the teaching faculty, both on a contract as well as on a permanent basis. Usually, the non-teaching salary is calculated in indirect cost. Salary is a fixed recurring cost that can also be considered for calculating BEP. Direct Variable Cost: Administration, Computer, Library and Study Tours undertaken by the respective departments come under this category. Indirect Cost: These are the total expenditures specified in Part I General Fund (Non-plan) Budget estimates. The actual expenditures for the Administration Department, General Administration Expenses, Engineering Division, Prasaranga University Printing Press, Karnatak University Library, Sports, Students Welfare Department, Central Workshop, Garden Department, Computer Centre, Health Centre, University Scientific Instrumentation Centre, Examination Centre, and the Debt and Deposit Expenditures. As per the 2005 NAAC report, there are 50 PG departments and 5 constituent colleges at the university. The number of students considered for calculation is 7451. The following shows the departments that work jointly, and calculation is carried out in a similar way. 25

Commerce+Cs

27

Anthropology + IDRHM

30

Computer Science (MSC + MCA)

32

Mass Communication & Journalism

42

Criminology & Forensic Science

45

Micro-biology & Biotechnology

English

Folklore

Sanskrit

Marathi

Hindi

Foreign Language

Music

Yoga

Physical Education

History & Archeology

History & Epigraphy Kannada Research Centre Dr. B.R. Ambedkar Studies

2

3

4

5

6

7

8

9

10

11

12

14

13

2653451

Kannada and Linguistics

1

0

226928

776354

1770005

435285

0

924616

509343

653678

587000

1119748

643843

1152056

Direct Labour

0

313377

1308129

1853767

601112

0

1276851

742094

805001

929449

1733706

1012673

1719299

4295067

Direct Expenses

Direct Cost

Department

Sl . N o.

49000

0

0

0

431900

327293

390880

266820

228000

125097

0

20125

236225

368378

12088

12088

7593

16585

11991

12088

15682

12088

0

11990

7593

17409

0

12186

0

0

850

3200

0

4250

0

5340

0

0

0

6725

0

8000

Comp uter

5049

0 2407 6

0

8644

9600

0

0

0

0

0

5292

0

0

0

0

27813

0

15848

0

0

0

0

0

0

0

2108 0 8000

Laborat ory

Libr ary

Service cost

Chapter Three

Indirect Cost (contract, guest) Teaching NonTeaching

Table 3.3 Calculation of Total Department Cost

54

77222

28683

66120

378597

36335

186131

446616

372953

303118

43491

84613

201709

229250

819103

Administration expenses

Administration Cost

8000

26413

6000

0

0

11380

6536

0

3350

0

0

0

60000

40000

Study tour/ confere nce

0

0

5700

2000

0

0

0

0

0

0

0

2000

7600

14072 00

151359

631565

2170746

4024154

1553080

550742

3077029

1908638

1993147

1697027

2945660

1909776

3412430

9624465

Student Support Service Cost Finan Total cial Department cost

Economics

MBA

Political Science

Philosophy

Psychology

Sociology

Social Work

Law

Commerce+Cs

Education

Anthropology + IDRHM

Library Science

Mathematics Computer Science (MSC + MCA)

17

18

19

20

21

22

23

24

25

26

27

28

29

Physics

33

32

Statistics Mass Communication & Journalism

31

30

16

Gandhian Studies Diploma in Women's Studies

15

4216971

530963

1443809

595353

1093108

1292713

2381218

1947971

1709459

1002033

1227210

1042435

1319014

1422423

1733424

1224806

1936454

0

378068

6693369

857540

2089219

822154

1694525

2015810

3721729

3032163

2672114

1558788

1923249

1726555

2026033

2194589

2778054

1948239

3066979

0

522095

20276

0

1000

3351299

0

388960

5348

0

245065

371039

209350

576000

0

0

0

604663

0

38675

27825

20257

7495

16679

39156

11990

7495

9638

18367

12088

0

21176

12088

7593

7593

12088

30068

7593

0

7495

19976

1790

31995

43780

8000

27900

17045

14789

18571

16450

11900

6150

9596

1595

9512

29250

6974

0

2400

0

0 3976 6

0

0

0

0

6400

0

0

0

0

0

0

0

0 7427 4

0

1589 4

433246

0

0

0

3999

0

20000

0

0

0

0

0

3850

0

0

0

0

0

0

1348477

468832

61985

306880

517746

352275

97118

242277

294287

204622

191704

4120

82870

80224

16666

362490

213466

7383

68506

Estimation of Cost in the Education System Using the Conventional Method

9492

10240

6944

0

3420

28616

86004

5211

3638

7400

33800

0

2149

0

2894

36861

3500

5000

0

1900 93670 0

5900

0

0

0

0

0

26700

2000 19200 0

0

6000

2000

21000

10000 19580 0

0

0

13698764

1918526

3657531

5158622

3332788

4113769

6338100

5267178

4981922

3352332

3620389

3367348

3457105

3708424

4573638

4506451

5244966

51058

1022283

55

Botany

Applied Genetics

Zoology

Geology

Geography Criminology & Forensic Science

37

38

39

40

41

Jainology

Karwar

Belgaum

Bijapur

Gadag

Haveri

45

46

47

48

49

50

51

TOTAL

Urdu-Persian & Arabic Micro-biology & Biotechnology

44

42

Bio-Chemistry

36

50051257

566738

0

0

0

1607470

0

0

0

407472

963106

1597714

1443463

0

591338

1327434

3596783

80612270

964988

0

0

0

2409963

0

0

0

562700

1420469

2585876

3448868

0

4777305

2260226

4248146

92945 1405115 3

388960

0

1385308

157250

0

1836257

326125

59665

302872

0

275233

192000

89598

232000

84675

2350256

0

0

951133

749079

0

12088

43455

0

12088

7495

21078

19730

21078

48624

16583

42090

Chemistry

410298

0

0

3022

15120

0

2275

0

0

6195

6841

7600

7960

10480

11745

16065

7910

9047

35

345047

7495

0

Electronics

34

0

Chapter Three

56

0 3232 5 1829 71 3232 5 4846 34

0

0

0

0 1600 0

0

0

0

2938

0

0

0

0

1868992

0

0

2600

5600

0

0

0

0

12800

12000

138239

122428

255472

111409

157860

537832

7996

18216097

109418

1012650

1452122

423764

163990

3362

1029816

119461

139781

301691

178628

1052021

280250

985042

740366

2000721

27145

533067

16000

12613

18255

0

0

25600

0

1858

9990

7688

22940

7875

0

0

3400

0

0

0 49535 00

0

0

0

0

0

0

0

3800

51800

0

51900

3800

35700

48000

0 19340 00

173531524

1782414

1597194

2459457

2578871

4338673

43325

2909528

463444

1214491

3073962

4552075

6429478

766018

6650761

4801934

12452157

396730

57

143826.9

143826.9

143826.9

English

Folklore

Sanskrit

Marathi

Hindi

Foreign Language

Music

Yoga

Physical Education

History & Archeology

History & Epigraphy

Kannada Research Centre

Dr. B.R. Ambedkar Studies

2

3

4

5

6

7

8

9

10

11

12

13

14

143826.9

143826.9

143826.9

143826.9

143826.9

143826.9

143826.9

143826.9

143826.9

143826.9

143826.9

Kannada and Linguistics

1

Common Library

Department

Sl . N o.

71617. 39 71617. 39 71617. 39 71617. 39 71617. 39 71617. 39 71617. 39 71617. 39 71617. 39 71617. 39 71617. 39

86527. 24

86527. 24

86527. 24

86527. 24

86527. 24

86527. 24

86527. 24

86527. 24

86527. 24

86527. 24

86527. 24

86527. 24

71617. 39

71617. 39

71617. 39

86527. 24

86527. 24

Healt h

Sports

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

Hostel

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

Employment scheme

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

Common computer centre

INDIRECT OVERHEADS PER DEPARTMENT:

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

Other Indirect expenses

12668 717

13148 923

14688 104

16541 512

14070 438

13068 100

15594 387

14425 996

14510 505

14214 385

15463 018

14427 134

15929 788

22141 823

TOT AL COST

5

4

20

16

16

4

16

16

16

16

16

16

16

26

No. of Courses

2533743

3287231

734405.2

1033844

879402.4

3267025

974649.2

901624.7

906906.6

888399.1

966438.6

901695.9

995611.7

851608.6

Total Cost per Course

60

40

66

142

80

80

50

22

107

22

24

110

36

300

No. of students

42229.0 6

82180.7 7

11127.3 5

7280.59 5

10992.5 3

40837.8 1

19492.9 8

40982.9 4

8475.76 2

40381.7 8

40268.2 8

8197.23 5

27655.8 8

2838.69 5

Total Cost per Student

Table 3.4 Addition of Indirect Overheads for Cost Per Course and Per Student (Total Cost = Total Department Cost+ Common Library+Sports+Health+Hostel+Employment Bureau+Common computer Centre+Other indirect Expenses)

Estimation of Cost in the Education System Using the Conventional Method

143826.9

143826.9

143826.9

143826.9

143826.9

Diploma in Women's Studies

Economics

MBA

Political Science

Philosophy

Psychology

Sociology

Social Work

Law

Commerce+Cs

Education

Anthropology + IDRHM

Library Science

Mathematics

Computer Science (MSC + MCA)

Statistics

Mass Communication & Journalism

Physics

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

143826.9

143826.9

143826.9

143826.9

143826.9

143826.9

143826.9

143826.9

143826.9

143826.9

143826.9

143826.9

143826.9

143826.9

Gandhian Studies

15

58

71617. 39 71617. 39

86527. 24

71617. 39

86527. 24

86527. 24

71617. 39

86527. 24

71617. 39

86527. 24

71617. 39

86527. 24

71617. 39

71617. 39

86527. 24

86527. 24

71617. 39

86527. 24

71617. 39

71617. 39

86527. 24

86527. 24

71617. 39

86527. 24

71617. 39

71617. 39

86527. 24

71617. 39

71617. 39

86527. 24

86527. 24

71617. 39

86527. 24

86527. 24

71617. 39

71617. 39

86527. 24

86527. 24

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

Chapter Three

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

26216 122

14435 884

16174 889

17675 980

15850 146

16631 127

18855 458

17784 536

17499 280

15869 690

16137 747

15884 706

15974 463

16225 782

17090 996

17023 809

17762 324

12568 416

13539 641

22

16

16

53

21

15

26

8

32

16

20

20

18

16

20

22

20

5

4

1191642

902242.7

1010931

333509.1

754768.8

1108742

725209.9

2223067

546852.5

991855.6

806887.3

794235.3

887470.2

1014111

854549.8

773809.5

888116.2

2513683

3384910

120

80

70

165

160

60

84

80

220

60

80

110

60

34

120

120

180

70

100

33849.1

9930.34 9

11278.0 3

14441.8 7

2021.26 7

4717.30 5

18479.0 3

8633.45 1

27788.3 4

2485.69 3

16530.9 3

10086.0 9

7220.32 1

14791.1 7

29826.8

7121.24 8

6448.41 2

4933.97 9

35909.7 6

143,826.9

143,826.9

143,826.9

143,826.9

143,826.9

7,191,345

Bio-Chemistry

Botany

Applied Genetics

Zoology

Geology

Geography

Criminology & Forensic Science

Urdu-Persian & Arabic

Micro-biology & Biotechnology

Jainology

Karwar

Belgaum

Bijapur

Gadag

Haveri

TOTAL

36

37

38

39

40

41

42

44

45

46

47

48

49

50

51

143,826.9

143,826.9

143,826.9

143,826.9

143,826.9

143826.9

143826.9

143826.9

143826.9

143826.9

143826.9

Chemistry

35

143826.9

Electronics

34

71617. 39 71617. 39 71617. 39 71617. 39

86527. 24

86527. 24

86527. 24

86527. 24

71617. 39 71617. 39 71617. 39 71617. 39 71617. 39 71617. 39 71617. 39 3,580, 870

86527. 24

86527. 24

86527. 24

86527. 24

86527. 24

86527. 24

86527. 24

4,326, 362

71617. 39

71617. 39

86527. 24

86527. 24

71617. 39

86527. 24

71617. 39

71617. 39

86527. 24

86527. 24

71617. 39

86527. 24

10,452, 593

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

209051 .9

750,737

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

15014.74

3,359,552

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

67191.04

5.96E+08

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

11924129

7.99E +08

14299 772

14114 552

14976 815

15096 229

16856 031

12560 683

15426 886

12980 802

13731 849

15591 320

17069 433

18946 836

13283 376

19168 119

17319 292

24969 515

12914 088

1114

48

26

56

148

32

4

32

32

20

16

16

16

16

16

16

31

16

Estimation of Cost in the Education System Using the Conventional Method

55,229,404

297911.9

542867.4

267443.1

102001.5

526751

3140171

482090.2

405650.1

686592.4

974457.5

1066840

1184177

830211

1198007

1082456

805468.2

807130.5

6296

750

180

350

870

180

20

120

30

66

60

50

80

40

88

50

150

100

963,445. 4

397.215 9

3015.93

764.123 2

117.243 2

2926.39 4

157008. 5

4017.41 8

13521.6 7

10402.9 2

16240.9 6

21336.7 9

14802.2 2

20755.2 7

13613.7 2

21649.1 1

5369.78 8

8071.30 5

59

Chapter Three

60

Analysis As per the table, the departments are ranked top 10 in ascending order. Table 3.5 Rank of the Department as per Total Cost per Course and Total Cost per Student Sl. No 1 2 3 4 5

Department Computer Science (MSC + MCA) Urdu-Persian & Arabic Micro-biology & Biotechnology Commerce+Cs

Total Cost Department per Course 333,509.1 Computer Science (MSC + MCA) 405,650.1 Commerce+Cs

Total Cost per Student 2021.266987 2485.693154

482,090.2

2838.695231

686,592.4

Kannada and Linguistics Micro-biology & Biotechnology Mathematics

4717.305299

725,209.9

Economics

4933.978835

546,852.5

4017.418178

734,405.2

Chemistry

5369.78813

8 9

Criminology & Forensic Science Anthropology + IDRHM History & Epigraphy Mathematics MBA

754,768.8 773,809.5

6448.412426 7121.248252

10

Sociology

794,235.3

MBA Political Science Sociology

6 7

7220.32082

Analysis and Findings We can observe that the Department of Sociology ranks the highest in terms of Total Cost per Course at 14.36% and Total Cost per Student at 0.75%. Similarly, the Department of Computer Science is the least costly in the top ten in terms of both Total Cost per Course at 6.03% and per Student at 0.21%. As per the Highest Total Cost figures, the departments of Physics, Chemistry, Kannada, Botany, and Zoology stand in the top 5 ranked departments. Conversely, the departments of Jainology, Women’s Studies, Dr. B. R. Ambedkar, Electronics, Yoga, and Kannada Research

Estimation of Cost in the Education System Using the Conventional Method

61

stand in the top 5 in terms of Least Total Cost per Department. Coursewise, the second-highest in terms of Total Cost per Course is the Department of MBA, which accounts for 13.99%; followed by Mathematics at 13.65%, History at 13.28%, Anthropology at 13.11%, Criminology at 12.41%, Commerce at 9.88%, Micro-biology at 8.71% and Urdu at 7.33%. Studentcost-wise, the second-highest in the Top 10 is the Department of Political Science, which accounts for 0.77%, followed by MBA at 0.66%, Chemistry at 0.56%, Economics at 0.51%, Mathematics at 0.49%, Microbiology at 0.42%, and Kannada at 0.29%. Prime cost, which constitutes direct costs – faculty teaching salaries and other expenses – accounts for 17% of Total Cost per Department. Works cost, which consists of indirect costs (contract teaching and non-teaching) and service costs (computer and library expenses incurred in each department) accounts for 2%. Cost of Production accounts for 3% of Total Cost, which includes administration costs. Cost of Sales, which constitutes total indirect overheads, accounts for around 78% of the Total Cost. The departments of science that are required to maintain labs are the most expensive as regards incurring expenses, with the exception of the Kannada & Linguistic departments in the Department of Arts. The courses offered by this department are few but the number of students taking them is the highest, which has led to it having the least total cost per department after MBA and Microbiology. DIRECT COST (Teaching Cost + Direct Expenses) Direct cost alone accounts for on average 17% of total expenditures. Direct cost increased up to 2009 and thereafter it has been decreasing at a negligible rate. This may be due to resignations, retirements, or the expiry of contracts. Permanent staff are being replaced by contract teaching staff, like teaching assistants, guest faculty, visiting faculty, etc. The direct costs in the Physics, Chemistry, Kannada, Anthropology and MBA departments, in descending order, are higher than in other departments. The direct cost is least in the Kannada Research Institute, and the Criminology, Gandhian, Physical Education and Foreign Language departments. In other words, in the Science faculty, Physics and Chemistry share the maximum, and under the umbrella of the Social Science faculty, the Kannada and Anthropology departments lead the list.

62

Chapter Three

NON-INSTRUCTIONAL COST DRIVERS (NON-TEACHING STAFF) The same results were obtained in this cost too. Non-instructional expenditures are usually higher in the Science faculty due to practical sessions in the laboratory, followed by the Arts faculty. CONTRACT DRIVERS (CONTRACT TEACHING AND NONTEACHING) The contract expenditures are increasing to reduce fixed cost. There are few departments where there are no direct costs, i.e. permanent faculty or faculty managing two different related departments. In such a case, it is managed by contract teaching staff. Yoga, Diploma in Women’s Studies, Electronics, Applied Genetics, Urdu-Persian, Microbiology, and Jainology are managed by contract teachers. Among the above departments, contract teaching is highest in Microbiology, Electronics and Yoga but least in Applied Genetics. This is due to the larger number of student enrolments in Microbiology + Biotechnology and Electronics. In the other departments, the contract instructional cost is highest in Computer Science followed by MBA as there are fewer permanent faculty and a higher number of courses offered. Therefore, the courses are managed by contract and guest faculty. This expenditure is a wasteful element in the total expenditure of the university. CONVERSION COST DRIVERS (ADMINISTRATION, COMPUTER, LIBRARY, STUDY TOUR/SEMINARS)

™ Administration Expenditure This expenditure has increased proportionately. Administration is the highest in the Science Faculty, around 35% of the total administration cost, but lowest in the Arts Faculty. For Arts, there has been no vast increase in this expenditure but in the Social Science and Science faculties it has decreased tremendously. Applied Genetics and Chemistry are the highest bearers of this expense, followed by Mass Communication & Journalism. ™ Computer Expenditure Computer expenditure shows a drastic declining slope in 2010, and this may be due to the initial investments in this resource. The Science Faculty carries the maximum share of this expenditure, around 44% of the total computer expenditure and then in order, Physics, Chemistry, and Applied

Estimation of Cost in the Education System Using the Conventional Method

63

Genetics in the science stream, and MBA, Anthropology and KRI in the social science stream. ™ Library Expenditure In this era of globalization, expenditure on books is decreasing as the demand for e-learning and the internet has increased. The reading habit has become incongruous with internet surfing. The Arts and Social Science faculties share around 25% and 24% of this cost, respectively. The Science Faculty shares a mere 1% of this cost. Within the Arts Faculty, the English and Kannada departments have the biggest libraries. This ranking is followed by the MBA Department in the Social Science faculty, which is 3rd in all departments and first in the Social Science stream. ™ Study Tours and Seminars Expenditure This aspect of study directly impacts the students’ learning. This indirect expenditure directly shapes their exposure to the outside world. The Social Science Faculty precedes the Arts Faculty in this source of expenditure, with around 42% and 36%, respectively. The MBA, Anthropology, Journalism, Geology, Jainology departments, among others, engage in study tour trips, seminars, industry trips, etc., to facilitate student learning rather than relying only on theory sessions. NON-ACADEMIC DRIVERS (INDIRECT COST) OF GENERAL ADMINISTRATION, PRASARANGA, PRINTING PRESS, GARDEN, COMPUTER CENTRE, ETC. Within this framework, the administration expenditure is higher than the salary expenditure, which is mostly incurred by the general administration department, engineering division, examination centre, university printing press, and the sports and computer centres. In terms of salary expenditure, general administration precedes the examination department, followed by the engineering division and the main library. Contract labour is highest in general administration and the examination department followed by the garden department and hostels. Administration expenditure accounts for around 75-80% of the total non-academic cost. Salary for staff accounts for around 15-20% and the rest, 10-12%, accounts for other expenditures like contract labour, and hostel and study tour/conference/seminar expenses. Within the parameter of general administration expenditure, the maximum amount is due to pension contributions, a mandatory gratuity. Travel allowances to employees, syndicates, and development funds also contribute a major share in this category. However, there is minimal expenditure on self-development programs, ICT training for teaching/non-teaching staff, faculty-exchange

64

Chapter Three

programs, and human resource development programs, which help to enhance the human capital of the university. The next major expenditure is involved in infrastructure development, repairs and maintenance of equipment, gardens, health, guest houses, computers, and hostels. A) Departments Showing Increased Operating Costs Along with Increased Total Cost Per Student The English, Sanskrit, Hindi, Foreign Language Studies, Economics, MBA, Commerce, Geography, Criminology and Forensic, Urdu–Persia and Arabic, Political Science, and the Philosophy departments have shown increased operating costs. B) Departments Showing Increased Operating Costs and Least Total Cost Per Student Kannada, Marathi, Yoga, History & Archeology, History & Epigraphy, KRI, Dr. B.R. Ambedkar Studies, Electronics, Applied Genetics, Zoology, Psychology, Sociology, Social Work, Law, Education, Anthropology, Library Science, Maths, Physics, Chemistry, Bio-Chemistry, and Botany departments and all 5 PG centres. C) Departments Showing Negative Progress Gandhian Studies, Diploma in Women’s Studies, Sericulture, and the Jainology and Folklore departments.

1,868,992

Prime Cost + Indirect Cost Works Cost+ Administrative Overheads Cost of Production + Indirect Overheads per Department

Cost of Production

25,571,656

Works Cost

Cost of Sales

18,216,097

Administration expenses

COST OF PRODUCTION

484,634

Direct Labour + Direct Expenses

410,298

Laboratory

Administration Cost

Prime cost

17,296,341

2,350,256

130,663,527

14,051,153

Library

Service Cost

Non-Teaching Computer

WORKS COST

80,612,270

50,051,257

Teaching

Indirect Cost (contract, guest)

PRIME COST

Direct Expenses

Direct Labour

Direct Cost

Table 3.6 Overall View of Cost Sheet

65

4,953,500

Financial

625,867,890.2

COST OF SALES

533,067

Study tour/conference

Student Support Service Cost

Estimation of Cost in the Education System Using the Conventional Method

66

Chapter Three

Figure 3.3 Showing Percentage of Cost Sheet

Figure 3.4 Showing Trend of Costs

Other Analysis Analysis for each activity for a decade helps us to analyse the growth and trend of each activity. This analysis highlights the behaviour of cost. Such interpretation is made for nine activities – Teacher’s salary, Contract teaching, Non-teaching salary, Contract Non-teacher’s salary, and Administration, Computers, Library, Study tour/seminars, and Laboratory expenditure – for planning and budgeting purposes. There has been an increasing trend since 2003, from 4.2 crores to 12.7 crores, in the cost of these activities. After the 6th pay commission, direct cost and indirect cost increased with the increase of other ancillary service costs and overheads. After tripling, there is a gradual increment of a 5% average in all PG

Estimation of Cost in the Education System Using the Conventional Method

67

departments of the university, and non-teaching salary expenditure has been gradually increasing by around 20% due to the implementation of the 6th pay commission by the state government. However, again, it declined, leading to high expenditure, Rs. 1.5 crores annually. From tables 1 & 2, we can observe a gradual increase in total contract teaching in all departments annually. It rose from a mere Rs. 78 lakhs to Rs. 1.4 crores, a 10% yearly incremental, and contract non-teaching now is almost 80%, which means it has increased almost five times. From the table, we can observe the ultimate fluctuating scenario related to administration, which ranges between Rs. 28 lakh and Rs. 39 lakhs, an average of 35%. We observe a sudden decline in computer expenditure and stability from 2006, which was very high at Rs. 9.1 lakhs. Now it is almost less than half as computer cost is a one-time investment, and the repairs/maintenance cost a mere Rs. 4.1 lakhs, which was incurred in four to five years. Library expenditure radically decreased from 2003 to 2007, i.e. from Rs. 4.1 lakhs to Rs. 2.2 lakhs, and then suddenly shot up to Rs. 4.4 lakhs in 2010 because of digitization. We observe a high expenditure for study tour/conferences/seminars in 2003, but it decreased drastically, from Rs. 22 lakhs to a mere Rs. 5.3 lakhs, in 2012, which is almost five times less. This trend has continued to date. Laboratory expenses follow a similar trend – a sudden decline from 2003 and fluctuating in the range of 10% to 40% to date; this is a decrease from Rs. 73 lakhs to Rs. 18 lakhs, i.e. it has dropped four times within the decade.

Conclusion The evolution of Indian education has tried to align itself with the growing needs of the population profile. Unlike the global education system, ours is mostly supported by government funding, which means everyone can afford to be educated. The fee structure of government-run professional courses has been fixed at heavily subsidized rates, even in institutions of excellence. On the other hand, seeing the need for exponential growth to put India on the global knowledge map, private initiatives have also been encouraged so the middle and upper classes can contribute to the investment in education. Social justice is addressed by requiring that a certain percentage of places are reserved for the poorer students so that the good infrastructure created by private investment is also available to the poorer strata of society. Education costs a great deal of money. In the year ended March 2011, public expenditure on education was well over Rs.75,000 million, and if the sums paid for private education are considered, the total figure is over

68

Chapter Three

Rs.90,000 million. Education takes up some of the total public expenditure and 6% of the GNP. This means that approximately 1/16 of all the resources available in any one year are devoted to providing education services. Education is a public good, so cost-effectiveness is a legitimate public concern. Accurate costing would turn public resources into a more useful source, i.e. allow resources to flow into scholarships for needy students and grants to students to attend institutions with a fully-fledged infrastructure rather than into inefficient programs and curricula. Higher education institutions are in a state of turmoil and fiscal crisis. Escalating costs, diminishing resources, inefficient productivity, increased competition, unhappy customers (students and parents), and state legislators demanding accountability are pressuring them to manage their costs better. Theories for measuring the organizational performance for non-profit institutions are difficult in terms of the settings in which they exist. Multidimensional criteria are needed to evaluate performance because of the multiple stakeholders. The central legislature is most interested in achieving high reported levels of educational outcomes subject to financing constraints. State and local administrators are concerned with outcomes too, but the budgetary constraints are more important. Teachers are expected to be equally concerned about their remuneration, quality of students, the instructional resources provided, and the ultimate educational outcomes as measured by objective measures such as state-wide test scores and ranking. The three main pertinent aspects of the non-profit environment are: 1) Lack of well-defined functions that tie inputs with outputs. 2) The frequent inability to measure the outcome in quantitative terms or the short term. 3) Tendency to measure in quantitative terms only and ignore the quality aspects. The technique used for identifying cost-effective tools has the potential to yield valuable insights into the trade-offs between expenditures and incomes. The methodology proposed does not require any skills beyond the ability to identify and quantify that which are applicable to a given context. This technique is feasible for actual decision making and budget estimates. By applying costing methodology in a public education setting, one can institute reforms by identifying the controllable factors, improving their operations and achieving greater cost efficiency and effectiveness. At the initial stage, we can evaluate the SWOT analysis.

SupportRelated

FinanceRelated

FacultyRelated

Controllable Factors StudentRelated

x Financial grants, subsidies, etc. x Efficiency in terms of higher student output x Upgraded technology in teaching aids & library x Should enhance infrastructure where the number of beneficiaries is more x Should enhance curriculum if the number of students is more

x Variances with context to budget estimates x Overheads

x Potentiality x Knowledge limited to syllabus x Multi-task orientation x Least research

x Enhancing human resources in different dimensions x Online library

x Revenues from projects, others x Hatching more for other sources

x Study tour/fieldwork. x Special lectures x Other exposures x Career development

Table 3.7: SWOT Analysis for University Weakness Opportunities

x Enrolment x Learning aptitude x Skills x Knowledge x Qualification

Strengths

Threats

69

x Abnormal or Excess expenditures of all type of resources

x No consultancy services x Not much collaboration with private industry x Dependence on central funding. x No effectiveness from investments

x Practices x Competency is low

Estimation of Cost in the Education System Using the Conventional Method

Chapter Three

70

We can conclude that direct cost alone accounts for an average of 70% of the total cost per course. Direct cost is the highest of the total costs but is slowly decreasing due to contract basis teaching and non-teaching management. This direct cost is highest in the Science faculty, followed by the Social Science faculty. The status of contract labour is similar – it is also the highest in the Science faculty. The Science faculty contributes most of the overheads, except for the library expenditure. Non-instructional drivers related internally to departments are the overheads, i.e. variable in nature, and account for between 8-10% of the total cost, out of which scholarship accounts for about 3%. Due to the constraints in gathering the data, the building costs – the respective electricity, water, maintenance, and repair charges – are not accounted for department-wise; otherwise, the overheads would be even higher. The contribution is 11% of its inputs, and the income, i.e. the fees paid by students, compensates for only about 14% of the total cost per student or processing cost in 2010. All development works, like the Karnataka University development, infrastructure, sports development, gymkhana, hostel, infrastructure facilities, etc., should be noted. Even repairs and maintenance lead to huge capital and revenue expenditures, which should be accounted for.

Other Conclusions ACTIVITY-WISE

™ Total permanent Teaching and Non-teaching costs have decreased in the last four to five years.

™ Contract Teaching and Non-Teaching costs are increasing, which ™ ™ ™

™

shows the trend of manipulating costs to minimize the total permanent teaching and non-teaching costs. Administration costs show an increasing trend. Computer and laboratory expenditures are also lower than the base year of 2003, although there have been increases in the cost prices of all materials. Study tour/seminar/conference expenditure, which also comes under plan expenditure, is decreasing as these are the ways to enhance students’ intrinsic values like communication skills, attitude, confidence level, and other requisite personal skills, etc. There is controllability in other overall indirect activities and overheads.

Estimation of Cost in the Education System Using the Conventional Method

71

™ The P/V ratio is almost positive at only 34%. ™ The contribution is positive for all departments but was negative for

Chemistry, Biochemistry, Botany, Applied Genetics, and Zoology during 2008 and negative for Mass Communication and Journalism in 2009 due to the increased variable overheads. ™ ROA has been almost negative for all eight years. Without grants, our position is not sustainable. Abnormal and excess expenditures should be managed for efficiency. Almost all hypotheses are critical, except for two. The accepted hypothesis states that cost per course and total cost per student are directly related to the number of students enrolled. Even the profit/volume ratio is enough to achieve a break-even point but nothing more. The hypothesis that is not accepted concludes that the university is not efficient in the utilization of its asset turnover, nor would it be sustainable without financial aids and grants.

Recommendations & Scope for Further Research POLICY RECOMMENDATIONS: Most of the evidence already cited clearly indicates that the university and departments should take corrective measures in the following areas:

™ Recognizing Inefficiency The usage of technology-related information and communication in the delivery of education will foster a milieu to cope with the forces of change globally. Future developments in education may cover transparent accreditation processes in new avenues to cope with demand, the upgradation of universities to make them globally competitive and, generally, the 3Es of cost management, viz. effectiveness, economies of operation and efficiency. For Departments Universities are obliged to provide quality education to students, and the variety of subjects varies from 64 to 154, which include certificate courses, diplomas, post-graduates, MPhils and PhDs. Despite the 97-99% pass rates in all the streams, only 3-5% of students achieve distinction and 15-20% a first-class degree. Performance evaluation is crucial to analyse the investment gap per student. Thus, the future condition should guarantee quality for students. Hence the learning method should move out of theory-only classes and include more practical sessions. For University

72

Chapter Three

The teaching methodology should be innovative, with new methods like the case study method, group discussions, the action method, more project-oriented work, etc. Needless to say, with the latest teaching aids and with the aid of the library network – Edu-sat, V-sat, Wiley Library, Harvard Library, etc. – students would receive quality exposure at their doorstep. Therefore, the university must embark on a bold, forwardlooking modernization programme. Though this may increase capital expenditure initially, all students would benefit in the future. Abnormal waste and sequences of work, like repetitive work sequences, a lot of paperwork with too many formalities, and rotation, create carrying costs, stationery, time, and maybe excess labour also. All such expenses should be reduced. Since the world is producing a standardized output, there should not be a shortage of potential students. Therefore, it is expected that the university will intensify its efforts to produce specialized students in this competitive and dynamic world.

™ Human Resource Management Since India has emerged as a global source of knowledge workers, the scale of output from the academic stream should be able to meet the demand. Such development requires the creation of millions of knowledge-based human resources as part of a national mission. The enlargement of the pool of professionals demanded by an extensive knowledge economy is another task to be dealt with. It would have to generate millions of new knowledge-based jobs. Performance standards should be evaluated periodically. For Departments All faculty should concentrate on all kinds of students irrespective of their background and focus more on the less-performing students by motivating them to participate in functions. They should encourage them to be creative to remove fear from their minds; enhance their confidence level, leadership qualities, soft skills, and, above all, good moral and positive attitudes, beliefs and ethics. The faculty should focus on productivity, i.e. versatile in all dimensions. This will indirectly enhance the social output and output values (student values). For University The success of any university is due to its intrinsic values, i.e. teaching staff as well as non-teaching staff. The recruitment of versatile teaching staff is already being done, which is crucial. Along with this, the refining of human resources by refreshers courses, faculty development programs, and workshops are equally fundamental. By pursuing more extensive

Estimation of Cost in the Education System Using the Conventional Method

73

outside exposure, these human resources can be utilized more efficiently, thus reducing the cost of contract teaching staff. Though the university offers many PhD-qualified faculties, there is a paucity of quality students. Similarly, there is a dearth of faculty in the departments managed by contract staff. In one way, we are compromising the quality of the teachers as there is no test for recruiting them. Recruiting a versatile faculty and utilizing their specialties would reduce costs. Fulltime research scholars on a scholarship of merit could also assist their tutors by teaching. This would be one way to minimize teaching costs. The number of PhDs awarded would also increase, which is one of the factors considered when assessing the quality attributes of the university. Expenditure on salaries alone absorbs over 65% of the total expenditure so efforts should be made for the optimal utilization of this input by prescribing a teacher-to-pupil ratio and a teaching-to-nonteaching ratio of 1:12 and 3:1, respectively, as suggested by the Punnayya Committee.

™ Government – Industry Co-Operation On the other hand, the new technologies in information and communication can work as powerful, cost-effective mediums for the delivery of knowledge to the smallest and remotest of villages for social and economic development. As the Father of the Nation Gandhiji said, India lives in villages. For Departments More seminars, conferences and workshops should be conducted in collaboration with outside states, which helps with networking and enhancing knowledge. Projects in collaboration with the private sector – case studies, action research and so on – would be inspiring. Consultancy services and involvement in the projects of various companies by faculty are recommended as it would earn revenue for the university. For the University Government aid would have produced results if the government had attached specific conditions for improving the competitive status of the students in the university. Unfortunately, in the absence of such mandatory requirements, the university may be reluctant to undertake revitalization programmes. Since the government is subsidizing the funding, the university must evolve a comprehensive, cost-effective policy. The government should come forward only with financial measures as a rigid safeguard against competition, significantly relaxing the reimbursement of loans, multiple subsidies, etc. Management’s starting point should be the self-realization

74

Chapter Three

of management, and the government should step in only when there are more problems than management alone can correct. Universities should be able to augment much-needed finances to support their educational programmes. In view of this, the universities should tap funds from industries and businesses by way of introducing courses and training programmes relevant to the needs of industries to increase productivity and enterprise consultancy research projects, the findings of which might help in reorienting industrial activities that would improve their earning prospects in the foreseeable future.

™ Accountability of Finance For Departments Universities should strive to raise more internal funds through lower direct costs (employment costs) and conversion costs (non-academic costs), i.e. indirect overheads. A potential source of funds available to universities are government projects, which can be undertaken by departments, seminars/workshops/conferences conducted or organized in collaboration with others. The gap between capital expenditure and capital recovery is quite large. The cost savings anticipated by improving the efficiency of all internal activities of the other outsource, like more projects from governments, NGOs, private industries, or the self-employed (entrepreneurs), would provide more capital recovery, which is essential for self-vitalization. Universities must generate internal resources to constitute at least 20% of the total recurring expenditure. For the University The government helps the university with its planned and non-planned expenditures. The university invests hugely to modernize its infrastructure with new, modern, and more efficient equipment. There should be accountability for any grants provided by central and state governments and their utilization. Infrastructure should be provided to the departments where there is a higher student turnover. The costs of the courses Basava Peetha, Kanaka Peetha, Basava Peetha, Vivekananda Kendra, Ambedkar Studies, and Urdu-Persian are being included in other departments that have faculty in common, and so the appropriation for the distribution of expenditure becomes inaccurate. The building, electricity, water, and dormitory costs are high as there are few students enrolled in these courses. Students can access practical vocational training courses where their services can be utilized to produce the products in practical sessions. This means the university can also diversify into short technical vocational

Estimation of Cost in the Education System Using the Conventional Method

75

training courses. Searching for various sources to increase revenue rather than depending wholly on grants is important. In the non-academic income, a major source of income that needs attention is the university’s printing press as the expenditure is higher than the income. The income through publications can be increased by establishing a university press with modern computerized facilities, which will indirectly help to disseminate the fruits of research. The rent of residential quarters should also be revised periodically. Yet another way of limiting expenditure is to reduce the administrative expenditure by effective economy, wherever possible. Utilization of the wasteland in the vast campuses of each university for agriculture purposes under the supervision of the Botany department would fetch a considerable amount, for example, and this could be a permanent source of income. Cash should never be kept idle. A considerable amount of money can be generated by intelligently placing the extra funds in various investments. Since interest can be earned even on 46-day deposits, some money could be invested in fixed deposits and other investments for varying periods. The fixation of fees by an institution will and should take care of the standard costs of providing education, scholarships and other subsidies after taking into account the other sources of revenues and funds, and the cost of raising those funds which, in turn, includes the priorities to be considered in fund management. The hypothesis that the university is efficient enough to grow without financial aids and grants was not accepted. Two operations are required to optimize resources and make the system cost-effective. One will involve networking with similar institutions in the areas of faculty and student exchange, joint academic and research programmes, faculty mentors, joint consultancy, continuing education and distance learning programmes, designing and updating instructional material, staff development, and data and information sharing, for example. The second, in the attempt to avoid the duplication of effort and the wastage of scarce resources, is to establish common laboratory facilities in specialized areas which will be shared by other institutions and used by industries on a cost-sharing basis.

Chapter Three

76

Table 3.8 Recommendations for Controlling Cost Non-Plan NonRecurring Long-Term Expenditure x Capital Expenditure x Building Expenditure x Development Plans

Plan Recurring Long-Term Expenditure

Non-Plan NonRecurring ShortTerm Expenditure

x Budgeting Expenditure x Workshop

x Engineering Workshop x Projects for Teachers x Insurance x Taxes

Efficiency

x Government and Grants x Debts x Deposits x Miscellaneous Receipts

x Pension Fund x Contribution from Provident Fund

Variance

x Orientation Programs x University Printing Press x Investments x Variants of Profitability by Volume

x Income from Students x Research Associateship x Research projects x Student’s IAS/IPS Training x Student’s Project Training x Cultural Exchange Programs x Vocational Workshops x Deferred Revenues from Consultancy Services

x Study Tour for Students x Seminars/Confere nce for Students x Facility Development Programs x Fellowship x International Seminars x Faculty Exchange between National/Internatio nal University

Effective -ness

Plan Recurring Short -Term Expenditure x Salary x Prasanga x Publication x Repairs & Maintenance x Technology Facilities x Books and Journal x Teaching Aid Materials x Laboratory x Computer Facilities x Excess Administration Overhead x Hostels x Awards to teaches/Nonteaching x Over Infrastructure Charges

SCOPE FOR FURTHER RESEARCH

™ Costing methodology for estimating the cost of admission, processing and examination per student.

™ Life-cycle costing for each course so we can analyse the disposal value of the student.

Estimation of Cost in the Education System Using the Conventional Method

77

™ Costing methodology to analyse only the cost spent by students, apart from fees.

™ Allocation and appointment of salary per activity. ™ A cost sheet is the conventional methodology so one can also go for target costing.

™ ABC costing would further aid in ABM (Activity-Based Management) and budgeting too.

CHAPTER FOUR ESTIMATION OF COST PER KG IN THE AGRICULTURE SECTOR USING ABC COSTING

Introduction Human resource availability in India’s agricultural sector is likely to grow by 2.1% in 2017-18, followed by industry (4.4 per cent) and services (8.3 per cent), according to the Economic Survey 2017-18. The Economic Survey indicated that the government aims to double farmers’ income by 2022, for which it has launched several new initiatives that encompass activities from seed to marketing. According to the statistical standards adopted while implementing cost of cultivation surveys, cultivators are becoming more and more conscious of the costs and returns from agriculture in general, and the enterprises on one farm in particular. Cultivators relate the price they receive for their produce on the market with their cost of production. The government considers the average cost of production when deciding the price policy and declaring the minimum support prices for selected essential crops. The commission that recommends the minimum support prices to the government is aptly named the Agricultural Costs or Prices Commission. In view of the rapid spread of technology in agriculture, farmers face fierce competition, and one of the ways to survive as well as gain better profits is to lower the cost of production. For this reason, farm costing or working out the cost of production of crops/enterprises is necessary; it is also useful as the farmers can keep watch on their expenditure, which is increasing in this era of modern farming. The world is interested in knowing which items are becoming expensive, so reducing the costs on such items and working out the methodology to control the cost per unit of those particular products is crucial. Of course, for this, farmers need to maintain regular farm records and accounts. At the end of the season or year, they can analyse the profitability of different crops and enterprises (subsidiary occupations) on a comparison basis as this acts as a forecasting technique that helps them decide their farm plans for the following year. The cost of production of

Estimation of Cost Per Kg in the Agriculture Sector Using ABC Costing

79

any crop/livestock product is the total of several components of expenditures incurred, so accurate measurements of all the components of costs are thus of crucial importance for the correct assessment of the cost of production of any crop. In response to these concerns, during the 1980s, the conceptual frame of ABC, which is one of the costing methodologies, was created in the United States based on the activities of companies. These activities are differentiated in various ways – the primary and secondary activities and then those that add value and those that do not. ABC is a methodology that identifies the different activities in an organization and assigns the cost of each activity according to the actual consumption of resources. ABC is generally used as a tool for understanding product and customer cost and profitability based on the production or performing processes. As such, ABC has predominantly been used to support strategic decisions for pricing, outsourcing, identification, and the measurement of process improvement initiatives. In the evaluation of the advantages and disadvantages of ABC, methods such as the quantitative method of comparison observe key business processes in the enterprise and use the inductive method. The origin and first use of management accounting can be traced to the early 19th century in the United States, especially in the textile industry, railways, iron and steel production, and distribution in retail stores. The primary objective of management accounting is to provide information to the managers of the company about those activities that are specialized to certain economic activities – production, transport or distribution. Corporate managers have tried to map all or most phases and processes that occur within these activities to get them under control. They found that higher profits can be created through the centralized management of complete process compared to the traditional exchange of output of certain processes in the market. Farming also has a positive role to play. The subject of this paper is to analyse the advantages and disadvantages of ABC in relation to the classical cost accounting methods. Traditional cost accounting methods were created when the direct costs of labour and materials were the only dominant factors of production, and changes in technology and consumer demand, which directly impact productivity, were not so rapid. The allocation of indirect costs, which could not be directly linked to specific products, was based on specific factors: the produced volume of different products, direct material costs, direct labor costs, and so on. The problem with traditional cost accounting became evident when the indirect costs (such as maintenance, insurance, production, preparation) reached significant amounts or even exceeded the direct costs. In terms of producing multiple

80

Chapter Four

products, the traditional cost accounting method may underestimate smallscale production costs per unit and overestimate the mass production costs per unit as it is based on the concept of the learning curve.

Preamble About Agriculture The word agriculture is a late Middle English adaptation of the Latin agricultnjra, from ager, "field", and cultnjra, "cultivation" or "growing", i.e. “cultivation in the field”. Since 1900, this transformation has been driven by a number of factors, including the diffusion of many crops and plants along trade routes, the spread of more advanced farming techniques, and an agricultural-economic system that promoted increased yields and efficiency. During this era, agriculture in the developed nations, and to a lesser extent in the developing world, increased in productivity as human labour was replaced by mechanization, and irrigation, crop rotation, and a pattern of cropping and fertilizers and pesticides were introduced on a large scale to greatly increase crop yields. The shift in agricultural practice changed the economy, population distribution, vegetation cover, agricultural production, population levels, urban growth, distribution of the labour force, cooking, diet, and clothing. Modern agronomy, plant breeding, agrochemicals, and technological developments have sharply increased yields from cultivation, but have also caused widespread ecological damage. The Green Revolution exported the technologies of the developed world to the developing world to support its growing population; as such, the technologies of the Green Revolution have allowed the world to produce a surplus of food. The following table shows the population projections in millions, population growth in percentages, the growth in demand for agricultural products in percentage per annum and the growth in agricultural production in percentage per annum.

Estimation of Cost Per Kg in the Agriculture Sector Using ABC Costing

81

Table 4.1 Projection of growth of population and growth for agricultural production

Population (millions) 2015 2030 World 7 207 8 270 Developing 5 858 6 910 countries Industrial 951 979 countries Transition 398 381 countries Growth in demand for agricultural products (% per annum)

World Developing countries Industrial countries Transition countries

2050 9 322 7 987

Population growth (% per annum) 2015 2030 2050 1.2 0.9 0.6 1.4 1.1 0.7

986

0.4

0.2

0.0

349

- 0.2

- 0.3

- 0.4

Growth in agricultural production (% per annum) 19972015 to 99 to 2030 2015 1.6 1.3 2.0 1.7

199799 to 2015 1.6 2.2

2015 to 2030

0.7

0.6

0.8

0.6

0.5

0.4

0.6

0.6

1.4 1.7

At the global level, there is adequate unused potential farmland. Accessibility and other constraints like non-availability and disparity of resources also stand in the way of any substantial expansion. Through overall projection, we can observe that in the world, growth in agricultural production is less than the growth in demand for agricultural products, which proves that agricultural production will be scarce and costly. The trends in the developing and industrial countries are similar, showing increasing population growth, growth in the demand for agricultural products and growth in agricultural production. In contrast, it is the opposite in the case of transition countries, which show a negative trend in population growth and an increasing trend in the growth of agricultural produce unable to meet the growth of agricultural demand. Developing

82

Chapter Four

countries will account for about 70% of the growth in crop production up to 2030 as the world population continues to increase at an average of 1.1% a year up to 2030. Agricultural production could probably meet expected demand over the period to 2030 to meet production projections and future yield growth with an annual rise of only 1.2% a year over the next 30 years, even without major advances in modern biotechnology. Overall, it is estimated that some 80% of production in developing countries will have to come from intensification for higher yields, increased multiple cropping, shorter fallow periods, and growth in manure use at1.1% per year over the next three decades. Yet, the growth in world demand for agricultural products is expected to fall from an average 2.2% a year over the past 30 years to 1.5% a year for the next 30. The slowdown will be more dramatic in developing countries, from 3.7% to 2%. Traditionally, the developing countries as a whole have had a net surplus in agricultural trade, to the value of US$17.5 billion, and the trend since then has been for their imports to grow faster than their exports. Fluctuating growth in effective demand, declining prices and the fact that hundreds of millions of people lack the money to buy what they need or have insufficient resources to produce goods and services have further contributed to the problem. In urban areas, the lack of access to food usually reflects low incomes, but in poor rural areas, it is often inseparable from the problems affecting food production. In many areas of the developing world, the majority of people still depend on local agriculture for food and their livelihoods, but the potential of local resources to support further increases in production is very limited, at least under existing technological conditions. Over one-third of the world's workers are employed in agriculture, second only to the service sector, although the number of agricultural workers in developed countries has decreased significantly over the past several centuries. The world as a whole has the production potential to cope with demand. India is the seventh-largest country in the world in terms of geographical size and experiences diverse agroclimatic conditions as it traverses tropical, subtropical and temperate climate zones. As such, it has the richest variety of flora and fauna in the world. India is the world’s largest producer of many fresh fruit and vegetables, milk, major spices, fresh meat, a few fibrous crops such as jute, several staples such as millets, castor oil seed, and ranks amongst the world’s five-largest producers of over 80% agricultural products, including many cash crops such as coffee and cotton. The agriculture sector occupies almost 43% of India's geographical area. As shown by the economic data, agriculture is an important sector of the Indian economy as this sector provides approximately

Estimation of Cost Per Kg in the Agriculture Sector Using ABC Costing

83

52% of the total number of jobs in India and contributes around 18.1% to the GDP. India produces around 81.285 MTs of fruit and 162.187 MTs of vegetables, which accounts for nearly 14.0% of the country’s share in the world production of vegetables. Although more than 70 types of vegetables are grown in our country, a higher emphasis is given to the more popular vegetables like tomato, brinjal, chili, cauliflower, cabbage, pea, potato, onion, and a few common cucurbits and leafy vegetables. The food processing industry in India, growing annually by close to 9%, contributing to 13% of the national exports and employing 60% of India’s working population directly or indirectly, has all the ingredients to catapult India into a virtuous cycle of sustainable development, inclusive growth and lower food inflation. According to the World Bank estimates, half of the Indian population will be urban by 2050. It is estimated that the percentage of agricultural workers in the total workforce will drop to 25.7% by 2050 from 58.2% in 2001 as a result of the enhanced level of farm mechanization. Change is happening in rural India, but it still has a long way to go. Agriculture has benefited from improved farming techniques, but growth is not equitable. An effort should be made to always review the wholesale prices that are primarily used to monitor the weekly price movements. There is a need to map required interventions in terms of storage facilities, logistics and processing units at the right place for the right commodity. For this vision, we need thorough planning, strong backup data and rigorous groundwork to understand the challenges and modalities of food production, surplus and deficiency. At the production level, the major challenge is low productivity, while at the post-production stage, the wastage rate is very high as it ranges from 11% in mangoes to as high as 90% in tomatoes. This has resulted in a low marketable surplus and low trade in the sector. Some other contributors are slow to utilize the developments in post-harvest technologies and their dissemination. Trade reports reveal four areas that the country needs to work on – to produce at low cost, productivity improvement through technological interventions, reduction of wastage through efficient post-harvest management and diversification of markets through the development of customized products. These also generate high incomes and employment, particularly for small farmers. Though India has many advantages in the crop and marketing sectors, it has several disadvantages too, like a lack of awareness of cost in different areas of agriculture, the mechanism of infrastructure is poor, and there are financial and natural resource constraints. The country lacks an efficient dissemination of information about the supply chains for the

84

Chapter Four

distribution of crops, which is one of the most important factors. Information should also include product flow, information flow and financial flow. The product flow includes the movement of goods from a supplier to a customer as well as any customer returns or service needs. The information flow involves transmitting orders and updating the status of delivery, and the financial flow includes all the financial aspects, such as invoices and payments. The population of India is growing very rapidly and the demographics are changing; there is an increase in the number of young working couples, changing tastes and preferences towards the consumption of basic foods items, an increase in double-income families, more exposure to advertising, and a tendency toward comfort and convenience, which influences the spending habits of the more health and hygiene conscious. In place of conventional wet markets, they prefer to buy vegetables, fruit and other agri-products from the supermarkets and modern retail stores, and this leads to the entry of more and more corporations into agri-food marketing, making the branded output more expensive, but its effect on the input level of agriculture is nil. Tropical juices and fruit pulp, canned pineapples, tomato paste, and canned and dried mushrooms are examples of fruit and vegetable products produced using traditional processing technologies and which are increasingly entering international trade. Dried and canned mushrooms produced in China currently account for 52% of the world trade in processed mushrooms while canned pineapples produced in Thailand account for approximately 45% of that product in world trade. These processing technologies focus on adding value with comparatively little product transformation while increasing product diversity, considerable opportunities for innovation and vertical diversification to tap the benefit from these opportunities.

Assessment for the Cost of Production Assessment for the cost of production of farming begins by classifying costs as variable or fixed, depending on the time they are incurred. This is due to the fact that, in the short term, some of the costs are variable while others are fixed; however, in the long run, all costs are variable. Thus, labour employed on a daily basis is variable while a permanent farm worker is considered fixed for a short period of time. Next, costs incurred on a farm are classified as cash cost or non-cash cost. Cash costs are when the farmer spends money for the acquisition of material inputs like seeds, fertilizer and chemicals or labour inputs like hired labour, etc. On the other hand, non-cash costs are attributable to items of cost which do not require

Estimation of Cost Per Kg in the Agriculture Sector Using ABC Costing

85

spending money, like family labour, payments made in kind, home-grown seeds, manure, exchange labour, depreciation, interest on operating capital, etc. The distinction between cash and non-cash costs is of significance, particularly due to the lack of resources for investment and thus one is under compulsion to borrow at the start of the season. The higher the amount borrowed, the greater the risk. Non-cash costs account for a substantial portion of the total cost in developing countries whereas it is the opposite in developed countries. Fixed costs are the costs incurred whether or not the production takes place. Some important items of fixed costs are implements and tools, machinery, farm buildings, and work animals. These could be cash or non-cash. Thus, land rent is an example of a fixed cash cost. Land rent paid in kind, the depreciation of farm machinery, tools and equipment, farm buildings, and the cost of maintaining farm work animals are examples of fixed non-cash costs. Variable costs vary directly with the production. The greater the production, the greater the variable costs. Variable costs may be either cash costs or non-cash costs. The sum of fixed costs and variable costs forms the total cost; when the total expenditure is deducted from the total returns (income), one gets the net profit. Table 4.2 Different dimensions and segmentations of Cost of Production Total costs = Variable costs + Fixed costs Cash Costs Capital costs Purchased seed, feed Depreciation costs and fertilizers, etc. opportunity costs of capital on owned machinery, Paid labour buildings and farm Custom services (machinery, equipment etc.) Farm overhead costs Unallocated fixed costs Non Cash Costs Farm-level taxes, permits licenses, etc. Unpaid family labour Land Costs Farm-produced inputs Land rents and imputed rents, land-related taxes Owned animals and machinery To increase the relevance, different dimensions of production costs and farm profitability should be assessed and analysed for farmers eager to know the returns of their operations above cash costs in order to estimate

86

Chapter Four

the cash available at the end of the production period. Some finance costs are mandatory, like land rent if not owned, taxes, and depreciation on machinery and buildings. Taxes on produce and owned land are exempt. Some inputs, like seeds, fertilizer and manure, are subsidized, and family labour expenses are not accounted for or paid. The percentage share of cash expenses in the total cost of cultivation of an irrigated paddy in India is 54.6%, which is quite comparable with 48.7% in Thailand, 55.2% in Indonesia, and 61.8% in the USA. In Mexico and Mauritius, however, it is quite high, i.e. 91.6% and 88.1%, while in Japan, Philippines, Republic of Korea and Burkina Faso, it is 24.2%, 40.4%, 42.0% and 17.9%, respectively. It is quite obvious that there are various factors responsible for the wide variations in cultivation costs in different countries, like climate, topography, endowments of natural resources, type of soils, managerial capabilities, and cultural practices. Another important source of variation may be in the adoption of methodology and items considered in the estimation of the cost of cultivation in different countries. It may be observed that there is a large variation in the cost of cultivation per unit mainly due to differences in the treatment of costs, which shows a difference in the cost of cultivation too. This wide variation per tonne may be due to the incomplete coverage of cost items in the estimation procedure. In light of these observations, it becomes important to standardize the procedures so that variations in cultivation costs attributed to the above-mentioned factors can be avoided. On examining the cost of cultivation of some items – e.g. it was observed that the cost of growing cotton per hectare is the lowest in India, i.e. $222.5 against $510.43 in the USA, $400 in China, $607.67 in Australia, and, the maximum, $1425.1 in Israel. The cost of insecticides and irrigation was very low in India. Comparison of cost per unit area does not reveal the real benefits on costs. It would be more justified to assess the cost of return on per unit of quantity. From the above exercise, it can be appreciated that due to the variations in cost items, accounting methods and estimation procedures followed by various countries, the cost of cultivation and its break down are not comparable. In addition, there are large variations in systems and types of farming due to variations in socioeconomic and agro-climatic conditions, including soil types, topography, land fertility, and agricultural practices. The results of this study further highlight the need for the adoption of a uniform methodology so that cross-country COP comparison becomes meaningful. Economists and analysts might require information on the trends in variable and fixed costs; policymakers and analysts might want total

Estimation of Cost Per Kg in the Agriculture Sector Using ABC Costing

87

economic costs by activity to understand the relevance of specialization patterns within agriculture and between agricultural activities and their impact on the economy. Economists used different indicators to understand effects while finalizing the net worth of the produce. Main economic indicators Total costs per ha [cash costs + non-cash costs + fixed costs + capital costs (replacement and opportunity cost of capital) + farm overhead expenses]/Total land area in hectares/acres/gunta. A common sub-aggregate is to display cash costs or purchased inputs only, or to add cash costs and land rental costs. When reliable data is available, indicators are often displayed for individual cost items, such as feed costs per animal unit, seed cost per land area, and labour cost per MT of output quantity. Some producers distinguish between costs compiled on the basis of data collected at the farm level and costs estimated using approximations, or imputed costs, which include non-cash costs as well as any cost item for which unit prices are not available, because either the input or capital item is owned by the farm. The unit in which the outputs and indicators will be presented first depends on the type of farm activity. The normalization unit should also make sense from an economic point of view, be consistent with the unit used to value output and be directly understandable and usable by farmers, analysts and any other actors interested in farm economics. For example, customary units, like number of bags of a certain weight or volume, etc., may be chosen in addition to other measures per unit that are generally used in the markets. Land area: For this unit, cropping activity is used. Planted area, harvested area or total land area is chosen, but if there is an agronomic and economic rationale for leaving part of the land unexploited, as in the case of specific crop rotations, then the total area should be used to reflect the production of the activity. Land unit should also be defined in relation to the standards managed in the region or country: hectares (ha), acres, etc. Costs can be expressed on a per hectare, acre or gunta basis. The cost per land area is likely to be more stable in the short term as technology and production techniques vary less from year to year than, say, crop yields, which are affected by growing patterns and weather conditions. In this chapter, the measure of land is per acres. Output quantities: For cropping activities, the unit that is commonly managed in the market is kg: a 50 kg bag of maize, a 65 kg bag of beans, etc.; for converting costs, standard units used by data collection agencies at national and international levels, such as the metric ton (MT) or 1000 MT, are also useful. For livestock, costs may be expressed on a per head or animal live weight basis, or another unit commonly used in the region or country. To better match average herd sizes, costs can be expressed in

88

Chapter Four

appropriate multiples, e.g. 100 or 1000 head. Similar principles can be applied to express the costs of livestock products: cost per 1000 litres of fresh milk, cost of producing 100 eggs, etc. In this chapter, the quantities of output of produce are considered the market value to purchase, which is in kilograms irrespective of the variety of produce. The pattern of purchase is the same for food, grains, and vegetables. Output values: The indicator expressed in this unit for output quantities, a ratio that measures the share of costs in gross revenues, i.e. the returns and relative competitiveness of the farm operations, is an indication of the profitability. Value must be used to express costs and to measure the additions that reflect production costs. These values can be gross or residual. Value is sensitive to changes in output quantities and unit prices, which are affected by a wide range of factors, including external market conditions, which are not related to production technologies. In general, gross indicators will be more stable, possessing higher leverage towards profitability than residual or difference indicators since they have fewer dimensions and less leverage. This makes interpreting the results correspondingly simpler but can also limit the conclusions drawn. Net returns per MT of output: The unit in which total returns are expressed can be chosen amongst the ones presented above, depending on the type of activity, regional or national standards, audience targeted, etc. Subsets of this indicator can be displayed, such as direct cost, indirect cost, fixed cost, variable cost, contribution, net revenue, net profit, etc. Breakeven price per unit of output: Total costs/total output. The costs that are variable should reflect total economic costs, and the output should reflect only the marketable output, excluding waste, losses, and own consumption. This ratio of fixed cost to contribution represents the “breakeven” price or the price to cover the production cost for one unit of product. This is the convergence point where there is zero profit/loss. If unit farm-gate prices are higher than the breakeven price, the farm operation makes an economic profit. Of course, several other quotients make sense as well. For example, one could calculate the price required to cover cash costs or total costs, excluding opportunity costs. Other indicators to assess costs A wide range of indicators that relate farm activity to environmental variables can be compiled. These indicators would be useful to characterize the environmental profile of farms within a country or region and to provide some indication of the expected costs for farmers associated with the adoption of environmental policies. Agrarian countries’ pattern of cultivation can be impacted by changes such as the shifting to less input-

Estimation of Cost Per Kg in the Agriculture Sector Using ABC Costing

89

intensive practices, usage of tractors and other machines, switching to hybrid seed, using fertilisers instead of natural manure, etc. Some of these indicators are presented and described below. Energy use: This indicator can also be expressed in terms of production unit. When used, fuel converts into energy, which could be converted to standard energy units (e.g. joules) or into monetary equivalents. However, the usage of electricity is shown in units of watts in the electricity bill. The individual items summed can be tailored according to usage and include the cost (or volume) of fuel used by machinery, equipment, and buildings only, excluding electricity costs. Care should be taken to avoid double-counting. This indicator, among its many uses, can serve as an input into satellite energy accounts. Fertilizer and pesticide: This indicator measures the intensity of fertilizer application for the production of a given commodity. To be relevant for environmental analysis, data on the type of fertilizer used (hybrid/organic), especially the concentrations of the different active components, is necessary. Similarly, the data on the number of pesticides used in a particular area matters a lot as the rate of pesticide use would be allocated according to the land area. Ideally, the application rates per hectare/acre of each of the active components should be provided, but this information may be difficult and costly to collect on a regular basis. Environmental pressure index: This index measures the emissions for a given pollutant associated with the use of a specific input. For example, the quantity of nitrogen application can be translated into nitrous oxide emission using an appropriate emission factor and expressed on a per ha basis. In addition to indicators that can be used for environmental purposes, a wide range of statistics measuring returns on the different inputs used can be established. These contribute to measure and identify the structural changes taking place in economic sectors, especially in agriculture, where, for example, higher returns on fixed capital are a wellknown feature of more sophisticated production technologies. Input productivity (Value of output/input use). This indicator measures the gross output in monetary terms generated by a given unit of input (return on inputs). A well-known indicator is labour productivity, which measures the value of output generated by a given unit of labour use (hour, day or month-equivalents, etc.). This assures us about the efficiency of the processing activity. Labour units are standard units for the measurement of the stock of labour in the household. They are calculated by assigning the appropriate labour unit equivalent to each household member and multiplying that by the percentage of time the member was available for work in the farm household during the previous year.

90

Chapter Four

Different labour unit equivalents are assigned to men and women in some countries, justifying the lower pay for women. It is observed that men and women doing the same work do not show any significant difference in work efficiency; therefore, labour flow (inputs) should not be weighted by labour unit equivalents. If actual hours are measured, and not days, the lower productivity of youth and older adults will be reflected in the shorter hour worked. Total factor productivity growth (Change in the value of output – Change in the value of inputs). This indicator measures the combined productivity, expressed in constant monetary terms, of all the factors employed in the production of a given commodity, including fixed capital such as machinery and buildings. It indicates the level of resources utilized as per the fixed schedule, layout, budgeted outlay, any variances, etc. These assessments verify our performance. CoP statistics allow better targeting for larger payoffs, which, in turn, elevates productivity. CoP cumulative distribution curves provide an example of the direct use of such data by farmers for benchmarking purposes.

Classification of Items of Costs Costs are the central elements in decisions that typically manage the growing interest in agricultural activities, which have become more and more complex, and decision-making activities that need to be supported by more information, which involves a huge cost to be efficiently managed. Crop choices, machinery renewal and the use of external services are some examples of decisions that require specific management information and accounting tools to set cost comparisons and support decision making to make agriculture more efficient and effective. Benefits-cost analyses of production (COPs) are generally provided to data suppliers indirectly through an improved methodology for estimations of cost for better administrative decisions and producing more for efficient markets. At the farm level, CoP data can serve as a means to better understand and assess a farm operation. It allows the producer to question their operation and benchmark it against the best practices of farms in the same region with similar physical characteristics. This, in turn, can lead to better farm-level decisions and improved market efficiency and performance. Some specific examples of how a robust CoP program can be used at the farm level are as follows:

Estimation of Cost Per Kg in the Agriculture Sector Using ABC Costing

91

x Enterprise mix decisions: Analysis can illustrate which farm enterprise is positively contributing to the whole farm financial picture and lead to reallocation between enterprises as appropriate. x Purchasing and marketing decisions: Pricing targets for inputs and outputs can be set at different cost breakeven levels. Knowing the breakeven points allows farmers and policymakers alike to take advantage of growing, buying or selling opportunities when they arise. The following formulas can assist in determining breakeven points. x Breakeven price to cover variable costs: Total variable costs ÷ Expected yield = $/unit produced. This is the minimum price needed to cover variable costs. x Breakeven price to cover total costs: Total costs ÷ Expected yield = $/unit produced. This is the minimum price needed to cover all costs. x Breakeven yield: Total costs/Expected price = unit produced (minimum yield required to cover all costs). x Investment decisions: Making the right investments in capital assets like land, machinery and buildings is critical to long-term success. Farm-level CoP data enables farm analysts, be they managers, outreach agents or policy analysts, to assess the effect of farm management decisions on farm efficiency, income and profitability, and advise farmers accordingly. For example, farm analysts can assess the impact of choices regarding the amount and type of variable inputs used, such as fertilizers or pesticides; the type of irrigation method implemented; and the amount and type of capital and technology purchased. This, in turn, enables farmers to understand better how to improve the efficiency and profitability of their operations, the differences in profitability for a given commodity, in two different cultivation schemes – irrigated and non-irrigated. This type of analysis is potentially useful for farmers in determining investments in irrigation by enabling them to weigh the costs and benefits of such investments.

Review of Literature Etaferahu (Eta) Takele, Area Farm Management Specialist, University of California, Riverside, specifies the “cost of production as the dollar value of all your inputs for growing a specific crop”. The inputs would include direct expenses and the variable cost of so many units of seed, fertilizer, irrigation water, labor, and machinery time, etc. Inputs would

92

Chapter Four

also include indirect expenses, which consist of variable and fixed costs. Cost of production would be derived from the summation of these expenses. Knowing the production costs of your crops is a prerequisite for determining how well your farm business is doing: the difference between the value of yield per acre and input value enables you to evaluate how efficiently resources are being used in your farm operations, to predict how your business will respond to specific changes, and to make other useful decisions for attaining your goals. Estimating costs is easy in some instances and more difficult in others. Assigning costs is more straightforward for those inputs or raw materials purchased for a single production period. If you use 20 pounds of fresh tomato seed an acre at $0.80 per pound, your seed cost is $16 (the seed quantity multiplied by its price). Costs for fertilizer, pesticides, irrigation water, and hired labor can be determined the same way. These can include entries to cover expenses such as office use, supplies, book-keeping, and legal fees. The name for a cost category is determined by its contents. For example, "direct operating costs" indicates that the values of the items included in the category are straightforward and used only in the production of one specific crop. A "variable cost" category means that its values can fluctuate, depending on the amount of input used. Fountas et al. (2006), who developed a DFD diagram, stressed the need for a simple structure with clear procedures to analyze the results in reports designed to support the transfer and recording from machines and equipment, human resources, service providers, and warehouses. The effort is to record the majority of costs as direct costs on specific activities on a single crop. Therefore, for machines, human resources and service providers, costs are measured in terms of time spent in a specific activity. Material usage is measured in terms of used quantity. These data report that the core elements of the system design show a limited portion of the system which allocates direct costs, and general costs need to be allocated according to an ABC procedure as the type of crop has a direct effect on the methodology of its cropping and the cost as per methodology, which are the two main categories in irrigated and non-irrigated land. Therefore, the system illustrates resource usage after collecting data from the field. These raw data are combined with the activity drivers defined in the setup of the system to generate activity rates and allocate general costs to single crops. Effective dissemination of the data collected through cost of production surveys is a very important aspect as it should be easily accessed by users for forecasting and planning. However, in many developing countries, such data availability and usage are limited to people living in urban areas. The overall scenario, particularly in

Estimation of Cost Per Kg in the Agriculture Sector Using ABC Costing

93

developing countries, is far from satisfactory. This, coupled with poor institutionalization, lack of consistency in the publication of reports, inadequate funds for publication, poor distribution of the compiled material, underutilization of the available communication facilities, and the lack of networking, is the major constraint in the flow of data in electronic form. The high cost of data dissemination and inadequate dissemination channels further complicate matters. Authors D. Brown, P. Booth and Giacobbe say that “Activity-based costing is one of the two or three most important management innovations in the 20th century and arguably the most written and talked about management accounting topic since 1985.” ABC is a cost accounting methodology that allocates costs to activities based on their consumption of resources. The costs are assigned to cost objects on the basis of the activities. This system attempts to accurately allocate overheads based on the actual factors that create costs. James A. Brimson calls ABC a tool for understanding cost. He further adds that ABC is “an activity-based costing system that assigns costs as they actually exist at a point in time – not as they should or could be performed.” The main objective is to define a model of ABC in agricultural production and assess its practical significance for cost management process improvement. The results of this research will indicate that the application of ABC in agriculture enterprises can improve the estimation of accuracy of cost per unit. However, it should be based on careful cost-benefit analysis. By 2030, soil organic matter from crop residues and manure, cost of production, and pricing could be managed adequately and effectively if better management practices have been introduced. In the past, cultivation was carried out manually, but now, due to increasing mechanization, the materiality of cost of cultivation consists of a combination of both expenditures. Although the perspective of manual labor is global, the thrust of manual work is on the technical aspects of cultivation costs, and the survey proves that farming technique used to have a direct impact on the cost of cultivation.

Cost Concepts Cost of production survey data can also be valuable to individual research workers for in-depth analysis. Such data has the potential to fill the gap in the existing data and enable the study of the trends of the economy. The value of products flowing into the farm household is the income, while the value of the resources flowing out of the farm household are the costs if resources are measured for value.

94

Chapter Four

Methods of measurement of cost items The method of measurement of cost items will depend on the item. Below are some of the methods that can be used. Purchased price This is a method of valuation of an item of cost on the basis of the current price as the actual purchase price. It is used for those items of cost that have both a short life span and whose values do not change substantially during that period. For example, inputs like fertilizers, chemicals, feeds, seeds, containers, and veterinary medicines can be evaluated on the basis of the purchase price. Normal market value or average selling price is used for items whose value does not change in a year. Thus, land value can also be evaluated by this method. Present market value Items that are not purchased regularly but are traded in the market are evaluated on the present market value. Thus, this method may be suitable for items like home-grown seeds, manure, the value of animal and man labour, products not sold but given away as gifts, etc. Depending on the age, livestock in the farm can also be evaluated on market value. Net selling price This is the selling price minus the cost of marketing. Used for farm products sold. Imputed value There are certain items for which no money is actually spent but they do contribute towards the growth of a crop. Proper evaluation of such items in terms of money equivalent is important for the correct assessment of cost production. For example, family labour is an important input in the enterprise but no money is paid by the farmer to his family members for the work done on the farm. Cost assessment in respect of such items is made by using the imputed value of cost. The family labour cost is generally imputed on the basis of the prevailing wage rate in the locality. It may be noted that the family of a farmer may comprise male, female or young children, all of whom may be doing some work on the farm. Although some operations like the plucking of leaves can be carried out more efficiently by the women, it is generally the case that the adult males can perform agricultural operations more efficiently than the females or the younger members of the family. Thus, the method of imputation of family labour cost would depend upon the particular member of the family involved in the farm operation. A general rule may be framed whereby the work performed by all is non-discriminated.

Estimation of Cost Per Kg in the Agriculture Sector Using ABC Costing

95

Replacement cost-less depreciation This is generally used for property whose value changes appreciably from year to year. This cost is not relevant or used in this chapter. Original cost-less depreciation This method is appropriate for items that are purchased to be used for a long period of time and for which there is practically no market for resale. Thus, this method of valuation is most useful for items like farm buildings, farm machinery, tools and equipment. The present value of each item is worked out by subtracting the depreciation successively from the original value. Depreciation can be worked out on the basis of any of these three methods: (i) Straight-line method (ii) Declining balance method (iii) Sum of the year digits method Straight-line method With this method, the yearly depreciation is computed by dividing the purchased value of an item with its expected life span. Thus, annual depreciation = acquisition cost/life span. If any item has a scrap value after its usefulness has expired, then the annual depreciation is given by (purchased value – scrap value)/ life span. Declining balance method This method supposes that the depreciation value decreases as the age of an item increases. Depreciation under this method is calculated as: Annual depreciation = book value x depreciation rate. Sum of the years’ digits method Depreciation using this method is calculated on the assumption that the depreciation in the initial years is more than it is in the later years. Annual depreciation thus is calculated on the basis of the formula: Annual depreciation Sum of the years’ digits of life span (purchased value - scrap value) x remaining years of life. It can be seen that under the straight-line method equal amounts are subtracted every year while in the sum of years’ digit method, the depreciation is faster during the earlier years than during the later years. The declining balance method presupposes that there is a scrap value for every commodity. The declining balance and sum of years’ digit methods are to be used when the farmer expects a bigger return on his investment during the first few years.

96

Chapter Four

Allocation of joint costs In case more than one crop is grown on a farm, it is very important to determine the cost incurred on the various items used on individual crops. While accurate assessments of crop-specific costs are impossible, reasonably good estimates of costs can be obtained by following the standard procedures of allocation of joint costs given below: Depreciation of farm buildings Can be charged to the individual enterprise in proportion to the total area when the building is used for different purposes. However, if the building is used for a single purpose, the entire depreciation can be charged to that particular enterprise. Depreciation of farm machinery, tools and implements As in the case of farm buildings, here also the depreciation or minor repairs can be charged to an individual enterprise in proportion to the area used. Alternatively, time spent on an individual enterprise by a given machine/tool or implement can form the basis for charging depreciation. Taxes and rental for land These can be allocated to the different enterprises in proportion to the land they occupy. Maintenance of farm animal costs These would be allocated on the basis of the proportion of time animal labour is used for the respective enterprise. Crops grown in a mixture Crops are often grown in a mixture. As such, it is not possible to determine the cost of various items attributable to individual crops. In such cases, any expenditure common to the farm as a whole is apportioned to the individual crops. For example, the cost of the maintenance of a bullock can be allocated in proportion to the number of hours the bullock is used for an individual crop. Depreciation, land revenue, etc. can be allocated in proportion to the area under each crop. The cost of cultivation of the main product can be obtained by deducting the value of the by-product from the total cost of cultivation. Family labour The evaluation of the cost incurred on account of family labour is a bit cumbersome as families comprise people of different age groups and sex. Then, there is a custom dimension attached to this item of cost. Further, there may be a particular kind of work that can be done better by men than women and must, in fact, be done by men or women. A possible solution may lie in converting all the work done by men and women into menequivalent. Specifically, work done by a youth under 15 years of age can be taken as equivalent to half the adult. Similarly, work performed by a

Estimation of Cost Per Kg in the Agriculture Sector Using ABC Costing

97

woman can be taken as equivalent to 0.8 men equivalent. It should be noted that these are general guidelines. The exact calculations will vary from situation to situation. For instance, there are certain jobs, like the plucking of tea and the harvesting and planting rice, that can be better performed by women than men, in which case there is no justification for evaluating the work performed by women as equal to 0.8 men equivalent. This cost approximates the actual expenditure incurred in cash and in kind, and includes the expenditure on the following items: a. b. c. d. e. f. g. h.

Hired machines Hired human labour or family members as labour Owned and hired bullock labour Seeds Manures and fertilizers Implement charges Irrigation charges Other miscellaneous charges

It does not include items like the estimated rental value of owned land and family labour as these are imputed costs of agriculture. Agricultural land and its produce are exempt from taxation to safeguard the interests of farmers as well as to enhance the yields. Similarly, interest on fixed capital and the mandatory managerial cost are not calculated as these are finance costs, which are usually not considered in costing methodology. In the examples below, the farmers are the owners of their agricultural land and hence tenant cost is excluded. These examples show the jowar, wheat and vegetable cultivators’ total cost for different agricultural activities and their percentage of profit from the revenues. The difference between the gross return from the sale of produce and the total sum of costs represents the total return to the cultivator for his labour, investments and entrepreneurial efforts.

Classification of Cost as Per Traditional Costing A. Direct Costs: 1. Human labour – (a) Family labour, (b) Exchange labour 2. Bullock labour – (a) Owned bullock labour and exchange bullock labour, (b) Hired bullock labour 3. Machinery Equipment and implement charges – Hired charges 4. Materials used – (a) Seed, (b) Manures & fertilizers, (c) Pesticides, and (d) Miscellaneous

98

Chapter Four

B. Indirect Costs or overhead charges: 1. Irrigation 2. Marketing 3. Land improvements 4. Farm buildings, fencing, wells Different components of variable costs may be evaluated as follows: Variable Labour (a) Labour may be evaluated as the sum of the following: (i) Fodder and feed attendant (ii) Wages of the cattle attendant (iii) Interest (iv) Depreciation (v) Other general charges (vi) Work done outside the farm but related to farming (b) Owned machine charges: Calculated on the basis of the cost of maintenance of farm machinery, which may include (i) Diesel (ii) Power (iii) Lubricants (iv) Depreciation (v) Repair (vi) Other expenses, if any The cost per unit for each expense can be accounted for as under: Cost of farm-produced seed, fodder and feed, Chemical fertilizer, Cost of insecticides and pesticides: The cost of farm-produced commodities can be obtained as per the prevailing locality prices of these commodities in the market. Farmyard manure: Farm-produced manure can be evaluated as per the prevailing locality rates. If it is purchased, then the evaluation is made on the basis of the purchase price or the purchase price, including the transport charges. Owned/hired, bullock and tractor labour: This cost may be evaluated according to the rate of hire charges for bullocks/tractors. The own bullock/tractor labour can be charged on the basis of the operational expenditure per hour.

Estimation of Cost Per Kg in the Agriculture Sector Using ABC Costing

99

Hired and permanent labour charges: These may be evaluated on the basis of 8 hours of work/per day in the field and the wages paid for such work. Cost of owned/hired irrigation: This may be evaluated on the basis of the actual amount paid. In case of own irrigation, the cost estimates can be based on operational cost per hour. Interest on working capital: The paid-out cost constitutes the working capital. The prevailing bank rate of interest can be taken to work out the interest on working capital for the duration of the crop. Different components of fixed costs may be evaluated as follows: Family labour The value of family labour can be imputed on the basis of wages of attached farm labour and the number of man-hours worked. Interest on fixed capital The present value of assets and equipment forms the fixed capital. Interest on this can be calculated in the same way as the interest on working capital. Rent on lease-in land This can be calculated on the basis of actual rent paid. Rental value of own land This can be evaluated on the basis of the interest on the value of land for the period of the crop. Or it can be taken as the rent paid for similar land in a given area. Management cost The management cost can be taken as a certain percentage of the total cost.

Benefits of ABC for an Enterprise As documented earlier, ABC would help hospitals in the promotion of cost-efficient operations and the management of product and service lines. If an enterprise's cost estimates are too high or too low, it risks making incorrect and perhaps disastrous business decisions. By providing more accurate costs, ABC improves the decisions made regarding case mix, procedure utilization and pricing. This system also identifies the activities that need improvement. To improve the management of any activity successfully, the enterprise must understand the activity's resource consumption, outputs and quality of performance. ABC would provide information, from support and sustaining activities (i.e. facilities management)

100

Chapter Four

to primary activities (i.e. processing procedures), to the enterprise. It goes beyond acting as an accounting system to serving as a strategic management tool. Today's enterprises often encompass diagnostic X-ray vision and dynamic resonance imaging. Within this operating environment, the ability to effectively schedule procedures is crucial for maximizing the use of expensive technology, elaborately configured facilities and highly trained personnel. To enhance or optimize operations in any enterprise, one can perform an activity analysis. According to Baptist, there are several reasons why improved costing procedures like ABC are needed for the ancillary activities of the enterprise. The traditional use of cost-to-charge ratios to determine procedure cost and profitability has proved to be inaccurate. There has been very little relationship between procedure costs to charges in the past. Inaccurate cost basis makes it nearly impossible to establish competitive procedure prices. In today's reimbursement environment, it is critical that a hospital's procedure price be accurately related to its cost. Accurate cost information helps hospitals achieve greater efficiency and productivity in these ancillary activities. Opportunities to Improve Value The modern approach of ABC actively engages every function of organizations to create process maps and estimate resource costs. This bridges the historical divide that has often led to tension and stalemates over cost-cutting steps. ABC builds a common information platform that will unleash innovation based on a shared understanding of the actual processes of care. Accurate cost assessments help to make valuable decisions that will lead to gaining more customers. Eliminate Unnecessary Process Variations and Processes that Don't Add Value In addition to reducing process variation, every activity requires the elimination of steps or entire processes to improve outcomes. It also reveals major opportunities for improvements. Comparing process maps and resource costs for various activities and resource costs across multiple sites determines how much of the cost difference is attributable to variations in processes, protocols and productivity and how much is attributable to supply service costs, e.g. recognizing the non-value-added activities will help eliminate such activity or replace with a new activity for the same cost.

Estimation of Cost Per Kg in the Agriculture Sector Using ABC Costing 101

Improve Resource Capacity Utilization The ABC approach identifies how much of each resource’s capacity is actually used to perform processes versus the unused and idle resources. Managers can clearly see the quantity and cost of unused resource capacity at various levels of functions of management. Resource utilization data also reveal where increasing the supply of certain resources to ease bottlenecked processes would enable more timely care and serve more customers with only modestly higher expenditures. When managers have greater visibility into areas where substantial and expensive unused capacity exists, they can identify the root causes. Another cause of low resource utilization may be available just in case the need arises. In such cases, understanding actual cost of excess capacity should trigger a discussion on how best to consolidate expenses that would both reduce the high costs of unused capacity and improve outcomes, e.g. this would help in the decision of whether to opt for leasing, rental basis or make storage provisions by expanding the existing warehouse for inventory management. Deliver the Right Processes at the Right Locations Many services today are delivered in resource facilities or more complex distribution channels. By accurately measuring the cost of delivering the same services at different facilities rather than using figures based on average direct costs and inaccurate overhead allocations, providers can see property resources and lower-cost locations. Such realignment improves the value by allowing tertiary activities to concentrate their specialized resources on truly complex service activities, e.g. ABC with logistics. Speed up Cycle Time ABC provides multiple opportunities to reduce cycle times for service provision, which in turn will reduce the demand for resource capacity. Speeding up cycle time also improves outcomes by minimizing the duration of uncertainty and discomfort, reducing the risk of complications and minimizing bottleneck progressions. Capturing the Payoffs ABC is a powerful tool to model the effect of an improvement in the usage of costs. Accurate costing allows the impact of process improvements to be realistically calculated, validated and compared. The big payoff occurs when organizations use accurate costing to translate the various value-creating opportunities into actual spending reductions. A

102

Chapter Four

cruel fact of life is that total costs will not actually fall unless organizations issue fewer and smaller paychecks, consume less space, buy fewer supplies, and retire or dispose of excess equipment. It is a hatchet approach to cost reduction by mandating arbitrary cuts across different activities. This approach jeopardizes both the quality and the supply of services. ESTABLISHING THE ABC SYSTEM IN ENTERPRISES Activity Identification and Design A basic premise of cost allocation in ABC is to allocate the costs according to the activity that caused them to be incurred. This process gives an accurate measure of the consumption of financial resources. The first step is to list the various groups of activities that make up the procedure. This is known as activity design or cost drivers, and this is a starting point to accumulate information about the costs involved with the procedures. Allocation of Costs to Activities In some enterprises, there is no conscious way of allocating costs and many times, they are allocated as indirect costs without regard for the cause-and-effect relationship. The activity cost details identify the cost driver for each activity, the volume of the cost driver, the cost per unit of the cost driver, and the total cost per procedure. In order to compute the total cost per procedure, we need to use time, numbers of processing unit and the factors used for the various cost drivers. Computation of Total Cost per Procedure Cost is identified by looking at the purchase of materials, payroll and other expenses. In the activity cost detail, the cost per unit is the aggregate detail of cost information pertaining to one unit of the cost driver factor. For instance, for an activity like provision inventory, distribution channels, sales point for customers, etc., this includes advertising sales promotion activities. So, the cost driver for the activity is the number of customers. The cost per unit equals the sales cost (cost driver) divided by the number of customers (cost factor). Like this, all costs per unit for each activity in the supply chain are added up to identify the total cost per procedure activity.

Estimation of Cost Per Kg in the Agriculture Sector Using ABC Costing 103

Fixed Cost Consideration The fixed cost included in the overhead is spread to the various ancillary activities. The fixed cost would remain whether we perform the specific activity or not. It is appropriate to include these costs accurately in the cost detail.

ABC for Estimation of Costs in Agriculture ABC was developed to deal with the increasing levels of fixed costs in modern companies. The allocation of fixed costs to products is complex and ABC “measures costs and performances of activities, resources and cost objects, assigns resources to activities and activities to cost objects based on their use, and recognizes causal relationships of cost drivers to processing activities”. The combination of DC (direct cost) and ABC enables cost-supporting detailed managerial analysis based on a precise view of the cost of a single crop, considering its relative use of machinery and human resources. In the agricultural and hotel industries, there is little evidence on cases of application of DC and, hence, the ABC methodology of costing for estimating the cost per unit for each type of activity in the spectrum of farm management. An ABC system is based on the idea that products make use of certain general activities developed inside the company, and that these activities require some resources. This means that, first, the costs of the resources are allocated to the activities and, then, the costs of activities are allocated to the products (costs objects) using specific activity drivers for each activity. In this way, it is possible to assign overheads to products in a more accurate and precise way. This logic enables managers to have better control over how products or services, brands, customers, channels of distribution, and facilities consume resources that generate costs. Furthermore, this logic fosters the understanding of patterns of resource consumption at the micro-level. Managers have access to a deeper level of information that enables corrective actions directed towards the enhancement of revenues, profitability and cost reduction. ABC prevents some distortions related to product cost information that arise from traditional accounting systems where the overheads (indirect costs) are arbitrarily attributed, usually in proportion to an activity’s direct cost. Traditional systems create higher distortions when there are sophisticated production structures, with a wide range of products or services that require the assignment of a large amount for general costs. ABC has been applied in case studies regarding different situations: fish processing in Finland, fish markets in Taiwan, combined with a linear

104

Chapter Four

programming technique, winemaking in Spain, ornamental plant cultivation in Spain, an analytic framework on Microsoft Excel, etc. Here, our purpose is to consider the specific information flows required by the use of ABC as it offers the possibility to collect a large amount of data that can be used to set a precise monitoring of costs with reduced intervention. Such processes could collect large amounts of data and perform detailed informationprocessing activities, a conceptual model to propose a possible architecture of the system incurring various costs to manage and control the normal and avoidable costs, which can be outlined as per the users’ requirements. In order to allocate general costs to crops and final products, after the identification of the activities, an activity driver needs to be identified for each activity. The choice of the activity driver needs to be consistent with the use of the underlying resource and selected according to the nature of the activity. In other words, each time the activity is performed, it should generate the same consumption of the underlying resource and the same costs. For each activity, it is necessary to calculate the activity rate, which is the unitary cost of an activity that is derived by dividing the total cost by the nature of the operation. Usually, the activity rate is calculated by dividing the overall cost of an activity by the overall volume of the activity. But in ABC, it is a common practice not to use as the denominator the overall volume of an activity but the overall capacity of the resource. The denominator presents the maximum volume that would be possible to produce with the resources assigned to the specific activity drivers defined for the different types of resources, e.g. total production overhead divided by the number of runs of operation. According to the request for simplification, resource usage is measured mostly in terms of duration according to the recent formulation of time-driven ABC, along with some viable alternatives that can be considered in the setup of the system. The final step of the procedure is the allocation of the cost to the products. The allocation for each product unit is calculated by multiplying the activity rate by the quantity of activity required by the unit of product. This is done for every activity. The overall cost of the production in agriculture is the sum of the allocated costs plus the direct costs, which is illustrated in the following table.

Estimation of Cost Per Kg in the Agriculture Sector Using ABC Costing 105

Table 4.3 Showing Cost Drivers for Allocation Cost Object

Cost Driver

Ploughing: Machine Cost

Number of Times

Labour Cost: 3 Days, 8 Hrs.

Number of working days

Sowing: Material Cost: Seeds (Pkt)

Number of Packets/Bags

Labour Cost

Number of working days

Cultivation: Material Cost: Fertilizer (Bags – 50 Kgs)

Number of Units

Pesticides (Ml)

Number of Units

Labour Cost: Spraying Pesticides

Number of working hours

Spraying Fertilizers

Number of working hours

Harvesting: Machine Cost

Number of times

Labour Cost Cleaning: 3 Labourers Overheads: Cutting & Loading Charges Carriage Charges Total

Number of working hours

106

Chapter Four

According to the American Agricultural Economics Association (AAEA), USA, capital replacement (depreciation) is included in the estimation of the full economic cost of the cultivation of a commodity but not in operational, variable or fixed cash expenses, while it is included in cash expenses. It may be appreciated that it is an amount set aside by the farmer for capital investment and is now considered as an imputed cost, not a paid expense. In India, under a comprehensive scheme, interest on working capital and fixed capital are calculated, but there is no breakdown of interest on owned and borrowed capital, or owned and borrowed working and fixed capital, which is a constraint in itself. In the US, all human and animal labour are treated as overheads while in India, these are considered as operational costs in economics. However, conceptually, hired bullock labour is a variable operational cost and the maintenance of bullock labour is an item of fixed cost. Also, while casual labour is clearly a variable operational cost, family labour cost may be taken as imputed overheads.

Working days

Labour Cost: 3 Days, 8 Hrs.

Pesticides

Labour Cost:

Pesticides (Ml)

Fertilizer

Material Cost

Cultivation:

Labour Cost

Seeds

Material Cost

Working days

Number of Units (Bags – 50 kgs) Number of Units – (1000ml)

Number of Units (Pkt) Working days

Number of times

Machine Cost

Sowing:

Type for Allocation

Cost Object/Resource Allocation Ploughing:

28,350

52,500

100

3

70,000

28,350

61,600

7350

14,700

Total Cost

Amt.

50

3

11

3

3

Number of Allocation

JOWAR

Table 4.4 ABC Method for Jowar and Wheat Crops

525

1400

9450

5600

2450

4900

9450

Cost per unit for 7 acres

1.35

0.075

0.2

1.35

0.8

0.35

0.7

Cost per unit

0

0

0

175,00 0 28,350

7350

14,700

WHE AT Total Cost

0

0

3

100

3

3

Number of Allocation

Estimation of Cost Per Kg in the Agriculture Sector Using ABC Costing

0

0

0

9450

1750

2450

4900

0

Cost per unit for 7 acres

0

0

1.35

0.25

0.35

0.7

0

Cost per unit

107

No. of Labourers

Number of Times

Loading Charges

Carriage Charges

25

9.589

0.071

0.043

0.9

0.9

1.5

1.35

0.616

500

300

6300

6300

10,500

9450

Profit per unit

25,000

500

900

6300

6300

10,500

28,350

15.41

1000

1

3

1

1

1

3

Chapter Four

Profit

Sales Price Per Unit

Total

Working days

Working days

Number of times

Working days

Cleaning:

Overheads:

Cutting 3 Labourers

Labour Cost

Machine Cost

Harvesting:

Fertilizer

108

500

900

6300

6300

10,500

0

1

3

1

1

1

0

500

300

6300

6300

10,500

0

0.663

11.94

18

6.06

0.071

0.043

0.9

0.9

1.5

0

1000 1600 3000

Plain

Router Machine

Labour Cost: 3 Days, 8 Hrs.

1800 3200

Labour Cost: SOWING SEEDS – 4 Labourers*Rs.150*3days

Machine Cost:

Sprayer Machine

Cultivation Activity:

3000

Seeds - 6000 Plantation

Material Cost:

Sowing Activity:

3200

BRINJAL Total Overhead AMT./Acre

Tractor

Machine Cost

Ploughing Activity:

Vegetables: Particulars

Working Days Number of Times

Number of Plantations

Number of Times Number of Times Number of Times Working Days

Type of Allocation

1

3

6000

3

1

1

1

Number of Activities

Table 4.5 ABC Method for Vegetable Crops: Cost Per Unit

3200

600

0.5

1000

1600

1000

3200

Cost per Activity

3.2

0.6

0.0005

1

1.6

1

3.2

Cost per KG

3200

1800

5000

3000

1600

1000

3200

Total Overhead AMT./Acre

3

1

1

1

1

3

3200

600

0.833 333

1000

1600

1000

3200

Number of Activities

6000

BITTER GOURD

Estimation of Cost Per Kg in the Agriculture Sector Using ABC Costing

3.2

0.6

0.00083 3333

1

1.6

1

3.2

Cost per KG

109

2000

Pesticides

10000 32000

Wages – 8 Days, 4 Labourers

Cutting

Labour Cost

Harvesting Activity:

Irrigation

6000

Overheads: Bore Water Charges- Rs.50/Hr.*10 Hrs./Week for 5 Months

9000

4000

Labour Cost: Spraying Pesticides – 3 Times*Rs.2000 Removing of Weeds – 2 Times*Rs.2000 Fertilizer Application – 3 Times*Rs.2000 6000

3900

Fertilizer 3 Bags*Rs.1300

Weedicides

5000

Manure

Material Cost:

110

Working Days

Working Hours Working Days

Working Days Working Days Working Days

Number of Tractors Number of Bags Quantity for Spraying

2000

3

3

8

3000

4000

50

1333.333

3

200

2000

6.666667

1300

2500

3

300

3

2

Chapter Four

3

4

0.05

2

2 1.33333 3

1.3 0.00666 7

2.5

9000

32000

10000

6000

4000

6000

2000

3900

1666

3

8

200

3

3

3

300

3

2

3000

4000

50

2000

2000 1333. 333

1300 6.666 667

833

3

4

0.05

2

2 1.33333 3333

1.3 0.00666 6667

0.833

95,900

300

Carriage Charges

Total

900

Loading Charges

No. of Labourers Number of Times

6539

1

3

27,390.5

300

300

27.39

0.3

0.3

Estimation of Cost Per Kg in the Agriculture Sector Using ABC Costing

94,566

300

900

6539

1

3 0.3

25.72

25,72 3.83

0.3

300

300

111

Chapter Four

Machine Cost

Labour Cost Sowing Seeds – 4 Labourers*Rs.150*3da ys

Seeds – 6000 Plantation

Material Cost

Sowing Activity:

Router Machine Labour Cost: 3 Days, 8 Hrs.

Plain

Tractor

Machine Cost

Ploughing Activity:

VEGETABLES PARTICULARS

Working Days Number of Times

Number of Plantation s

Number of Times Number of Times Number of Times Working Days

TYPE OF ALLOCA TION

3200

1800 1

3

6000

3

3000

6000

1

1

1

Numbe r of Activiti es

1600

1000

3200

TOMATO (NI) Total Overhead AMT./Acr e

3200

600

1

1000

1600

1000

3200

Cost per Activi ty

3.2

0.6

0.00 1

1

1.6

1

3.2

Cost per KG

3200

1800

2000

3000

1600

1000

3200

RADISH Total Overhead AMT./Acr e

1

3

6000

3

1

1

1

Numbe r of Activiti es

3200

600

0.333

1000

1600

1000

3200

Cost per Activi ty

3.2

0.6

0.00 033

1

1.6

1

3.2

Cost per KG

Tracto r Bulloc k

Other Partic ulars

Table 4.6 ABC Method for Vegetables: For *I – Irrigated land and *NI – Non-Irrigated land

112

3200

2600

3500

5551

3551

BRINJAL(I) Total Overhead AMT./Acr e

1

1

6000

1

1

Numbe r of Activiti es

3200

2600

0.5833

5551

3551

Cost per Activi ty

0.13 0 0.16 0

0.00 0

0.17 7 0.27 7

Cost per KG

Irrigation

200 8

10,000

32,000

4000

50

2000

4

0.05

2

1.33 33

32,000

10,000

4000

8

200

3

3

3

4000

50

0

1333.3 33

2000

4

0.05

0

1.33 33

2 40 Labour *250 8hrs*3 50

2234

25 labour ers*25 0

6250

2800

10,000

Working Hours Working Days

3

6000

1333.3 33

6000

6293

0.01 67

2914

0.3 0.43 33

Overheads: Bore Water Charges – Rs.50/Hr.*10 Hrs./Week For 5 Months Wages – 8 Days, 4 Labourers

3

4000

2

16.67

433.33

300

Working Days Working Days

2000

300

3

1

Removing of Weeds – 2 Times*Rs.2000 Fertilizer Application – 3 Times*Rs.2000

3

5000

1300

300

2000

6000

0.01

1.3

0.83 3

Working Days

10

1300

833

Labour Cost: Spraying Pesticides – 3 Times *Rs.2000

300

3

3900

3000

2

1666

2463

Number of Tractor Number of Bag Quantity for Spraying

1500

Weedicides

Pesticides

Manure Fertilizer 3 Bags*Rs.1300

Material Cost:

Sprayer Machine

Cultivation Activity:

Estimation of Cost Per Kg in the Agriculture Sector Using ABC Costing

25

3

3

3

2

150

3

3

1

250

3333.3 33 933.33 33

666.66 67

1231.5

14.893 3

971.33 33 2097.6 67

1500

0.01 2

0.16 7 0.04 7

0.03 3

0.00 1 0.06 2

0.04 9 0.10 5

0.07 5

113

Total

Carriage Charges

Loading Charges

Cutting

Labour Cost:

Harvesting Activity:

114

Working Days No. of Labourers Number of Times

300

900

3000

6539

1

3

3

0.3

23.7 3

23727. 33

0.3

1

300

300

1000

78,600

300

900

3000

6538

Chapter Four

1

3

3

20,333 .67

300

300

1000

20.3 3

0.3

0.3

1

0

286 labour ers*20 0

113,256

300

900

57200

6202

1

2

2

55,251 .31

300

450

28,600

2.76

0.02 2 0.01 5

1.42 9

Harvesting Overheads: Carriage Charges

Direc t

Indire ct

Total

1400 525

Sowing Cultivation: Fertilizer Pesticides (Ml)

8025

500

5600

1.146

0.071

0.2 0.075

0.8

For Jowar and Wheat MATERIAL COST Cost per unit for 7 Cost per acres unit

Ploughing

By Relation

BY BEHAVIOUR

15,400

10,500

4900

MACHINE COST Cost per unit for 7 acres

Table 4.7 Classification of Cost by Nature, Relation and Behaviour

™ By Nature of Expense, Relation and Behaviour

Classification of Cost:

1. 5

1. 5 Cleaning Loading Charges

Cost per unit 0. 7

Analysis & Interpretation

0

41,250

300

6300 6300

9450 9450

9450

2450

LABOUR COST Cost per unit for 7 acres

Estimation of Cost Per Kg in the Agriculture Sector Using ABC Costing

5.893

0.043

0.9 0.9

1.35 1.35

1.35

0.35

Cost per unit

115

Chapter Four

116

Figure 4.1 Cost by Relation and Behaviour

Usually, ABC costing is only for variable overheads. In cost of production of agriculture, all activities are identified, and relevant cost has been considered as overheads, as in the service industry, for ABC calculation. Cost for Management Decision Making: ™ Marginal Cost This is the aggregate of direct cost and variable costs, i.e. prime cost plus variable overheads. From figure 4.1, one can see that the direct cost for machinery is more than its overheads. The overall view is that the labour cost is more expensive than any other charges. ™ Opportunity Cost This is the value of the alternatives foregone by adopting a particular strategy or employing resources in a specific manner. In this case, we are using the machines for ploughing activity; if the same work was done manually, it would take more days and more labourers. This would increase the cost further and so the probability of impacting the level of profitability would be higher.

Estimation of Cost Per Kg in the Agriculture Sector Using ABC Costing 117

™ Replacement Cost Technology definitely impacts the frequency as well the number of labourers required for each activity. If the switching cost is high, then there is less chance of the need for replacements. For example, if the plan is to replace two bullocks with a tractor for the principal activity of agriculture, then the cost of maintaining the tractor would need to be compared with the cost of feeding the bullocks with fodder, growing/purchase of fodder, cleanliness of animals and the space provided to them, cost of attendance to these animals, medical check-ups, cost of medicines, etc. incurred per year of rearing these cattle – quite a sum in total. In the case of the tractor, costs include a one-time purchase investment, maintenance costs, operating costs like fuel and oil, repairs, if any. All these costs would be considered if the tractor was owned by the farmer; otherwise, there would only be hire charges in both cases. Usually this is the case of hiring nowadays and used in above calculations. Figure 4.2 Percentage of Using Bullocks During Agriculture

x As per this analysis, in the case of brinjal, only bullock labour is used on irrigated land only for the preparation of layout and during inter-cultivation activity. The tractor used was 3.551 units/acre; similarly; bullock labour 5.551 units/acre and the sprayer 7.5 units /acre.

118

Chapter Four

™ Relevant Cost and Imputed Cost Usually, both types of labour, i.e. family members and hired labour, are involved in all the stages of agriculture, from the ploughing to the harvesting, which includes both manual and machine work. Figure 4.3 Percentage of Utilization of Manual Labour

x This graph, which refers to growing brinjal on irrigated land, illustrates that manual labour is required the most at harvesting time at the rate of 77%; in fertilizer application 2%, weeding 11%, transplanting 3%, and irrigation 7%. For the preparation of layout and inter-cultivation activity, machine/bullock work is needed. The variable cost incurred for human labour was Rs 82,580 per acre, where the ratio of family labour constituted 158.9 units per acre, hired labour constituted 254 units per acre and total variable cost accounts for 412.9 units per acre.

Estimation of Cost Per Kg in the Agriculture Sector Using ABC Costing 119

™ Normal Cost Figure 4.4 Cost of Various Activities in Agriculture

As per this graph, based on figures for growing brinjal in irrigated land, the total cost for one acre can be broken down into tractor 12%, bullock 18%, FYM 8%, seeds 11%, fertilizer 21%, pesticides 7%, weedicides 8%, and micronutrients 10%. Another data analysis examines cost cultivation and returns in Karnataka. This report shows the farmers incur 13.53% of the cost on family labour and 23.23% on outside labour, and the total amount for wages is approximately Rs 82580 annually. In the preparatory stage, cleaning and other activities are done by tractors, bullocks and sprayers, which account for 1.52% for tractor (hrs.), bullock labour 2.33%, and sprayer 0.64% of the total cost, respectively. Some inputs, such as FYM 1.11%, seeds 1.5%, fertilizers 2.71%, pesticides 0.962%, weedicides 1.06, and micronutrients 1.25%, are added to the crop at different stages. As for marketing expenses, the cost of loading incurs 2.79%, transportation cost is 11.19%, and the cost of unloading is 2.79%. There are also additional expenses on crop insurance 0.86% and livestock insurance 0.86%. As for the farm management division KSDA Bangalore, we take the rental value of the land at 25% of the gross income, i.e. 22.64, and the managerial cost at 15% of all cost. The overall cost is Rs. 23,208, the output is 20,013 kg and the return is Rs.210,333. Finally, the cost of brinjal production in irrigated land is 1,161 Rs/qtl. Farmers face a loss of Rs.21,875.

120

Chapter Four

Table 4.8 Calculation of P/V Ratio & Bep in Value x Profit Volume Ratio Formula=Contribution/Sales =156,185/210,333 = 26%

x Break-Even Analysis Formula=Fixed cost /PV Ratio = 80,019/0.26 = Rs 307,765 Per Kg. = Rs.11.60 (20,013kgs)

Conclusion Farmers cultivating brinjal on irrigated land are facing running at a loss. The PV ratio works out to be 26%, which is quite low. BEP, i.e. fixed cost/PV ratio in terms of price, works out to be Rs 307,765, and when converted into units, it amounts 29,707 kgs. In order to realize the BEP price cost of production, farmers must produce more and, obviously, the cost per unit/kg must be reduced to the rate of Rs 10.26 per kg. This indicates that growing brinjal on irrigated land is not a loss-making activity. The production cost of brinjal works out to Rs 11.61 /kg against a selling price of Rs 10.36/kg, which is insupportable for brinjal growing in non-irrigated areas. According to ABC, most material cost is incurred during ploughing, machine cost during harvesting, and labour cost is high overall.

References [1] An Introduction to Agricultural Social, Subhash Chandra, New Visha. [2] Current State of Agriculture in India 2012, Golden Peacock. [3] Agriculture in India, B Sambasiva Rao, Serials Publications. General Agriculture, Muniraj S Rathore, Jain Brothers.

CHAPTER FIVE SERVICE COSTING FOR TRANSPORT

Brief History of the Transport Industry Transportation industry:  The transportation industry, which involves carrying passengers and freight, is among the largest employers in the world.  In case of trucks breaking down, either another truck is sent from the nearest point or the same truck is repaired. In such cases, breakdown action will be taken after consulting the garage division.  If the goods are not claimed after three notifications, then they are given to the unclaimed property section. This section has the authority to auction the goods.  In case of damages, a damage certificate is issued by the office that receives the goods. This document is used to claim compensation.  Re-booking is done by the consigner when the consignee refuses to take the goods. The consigner makes a note to the transporter to rebook it. The same procedure of booking is followed, and the consigner must pay the same charges. Infrastructure: This includes the construction and maintenance of roads canals, terminals, stations, depots, and seaports. The ownership of the transportation infrastructure may be public or private. Operations: This encompasses the methods by which vehicles are operated. It also includes their financing and legalities. The primary mode of transportation in the early ages (after the invention of the wheel) was the animal-driven cart. The Romans were the first to build paved roads. The development of cities across the world led to the growth of shipping, aircraft, automobiles, etc.

122

Chapter Five

It is virtually inconceivable in today's economy for a firm to function without the aid of transportation. Transportation is a major sub-function of logistics that creates time and infers utility on goods. In fact, the backbone of the entire supply chain is transportation management as it makes it possible to achieve the desired goals. Factors such as the globalization of the markets, imitational economic integration and the removal of barriers to business and trade, and increased competition have an enhanced need for transportation. Transportation is one of the most important infrastructure requirements – it is essential for the expansion of opportunities and plays a vital role in making or breaking competitive positioning. Transportation is largely influenced by information technology and communication, with the focus being knowledge about customer needs and value-added service. Today, the Indian consumers’ standard of living and level of expectation have gone up dramatically. They have become word-class customers and expect world-class service. Hence, it is customer service that is going to give every industry a competitive edge in the future. Major players in the transportation industry The following are the major players in the transportation sector ™ Railway and roadway o The US has the biggest railway and roadway networks, followed by Russia and Canada. ™ Airways o The major players are British Airways, Lufthansa, Qantas, and Southwest Airlines. ™ Shipping and logistics o The chief shipping companies are APM Maersk Mediterranean shipping company and CMA CGM Groups.

Preamble From the beginning of history, transport is the history of civilization, and human sensitivity has revealed an urge for mobility, leading to a measure of society's progress. For any country to increase the mobility of its labour and capital with the right momentum, a modern and efficient transport infrastructure is a must. It has also been seen that a proper,

Service Costing for Transport

123

extensive and efficient transport system has played a major role in tourism management, which has a direct impact on the percentage of GDP which is connected to economic development. “Transporters” is one of the most important parameters for assessing them as Users, the rate of their performance matters at every stage of advanced civilization. Where roads are considered the veins and arteries of a nation, passengers and transported goods are the blood that circulates. Transport is the essential convenience which connects borders and enables progress for liberalization and globalization. Transport provides rural connectivity, which is vital for generating higher agricultural incomes and productive employment opportunities as well as promoting access to economic and social services. Transport bridges the gap between production and consumption centers by virtue of improvements in the speed of distributing perishable goods in the minimum possible time, equalizing supply and demand factors and stabilizing the price of commodities. Transport improves competitiveness by penetrating, concentrating and diversifying to gain new customers in new places, ensuring the growth of industries for all products and balanced climatic factors which, in turn, reduces prices for further development of marketing and economy. Road transport is one of the most important modes of transport. It is the means of transport classified on the basis of the vehicle, the power used to reach the terminals. Road transport, which covers a wide network, carries over 80% of goods and over 70% of passengers as transportation by road is cheaper, longer, and accessible. The railway was the pioneer of modern mechanical transport, which covers more than 60,000 kilometers all over India. It brought about the greatest revolution in transport and accelerated the commercial and industrial development of various countries. Until the introduction of motor transport, the railway had the monopoly after water transport, which is also the cheapest and oldest form of transport. Water transport is composed of the coastal shipping trade, the tramps, oil tankers, passenger liners and the cargo liners on the basis of their working overseas shipping defined routes with fixed places and fixed times; the natural gifts, hence do not require a large amount of capital expenditure for the construction of roads or railway tracks. In addition to that, the running cost is also much lower. Last but not least, air transport is the gift of the twentieth century to the world; it can also be divided into passenger and cargo transport. The first flight was achieved in 1903, and since then it has made more than notable progress and provided tough competition for the railways.

124

Chapter Five

TRANSPORTATION IN INDIA As per the Central Statistical Organization, the transport sector accounts for 6.4% of India’s GDP; of which railways account for 1.2%, road transport for 4.5%, water transport for 0.2%, air transport for 0.2%, and services for 0.5%. The alternative modes of transport, viz. roadways, railways, waterways, airways, mass transit, each contribute to the transportation requirements of the economy as the transport system in India is well-knit and coordinated with a number of distinct inter-modes and services. Railways and roads continue to be the dominant means of transport, carrying more than 95% of the total traffic in the country although other modes, such as coastal shipping and inland water transport, are also expected to play a greater role in the foreseeable future. A good road network is a critical infrastructure requirement for rapid growth as it provides connectivity to remote areas, provides accessibility to markets, schools, and hospitals, and opens up backward regions to trade and investment. Roads also play an important role in inter-modal transport development, establishing links with airports, railway stations, and ports. According to the National Highways Authority of India, India has one of the largest road networks in the world, 33.14 lakh km, consisting of 200 km long expressways, 32% with single-lane/intermediate lanes, 56% (7) with double lanes, 12% with four or more lanes; national highways (NHs) with a road length of 66,590 km, comprising only 2.0% of the network but carry 40% of the road-based traffic; state highways (SHs) of 131,899 kms; major district roads (MDRs) of 467,763 kms; rural roads (RRs), which includes other district roads and village roads, of 2,650,000 kms, which carry about 40% of the total road traffic and enable the development of the rural economy and the industrial growth of the country. The transport demand for freight and passenger movement within the country has steadily expanded the scope of operation and is also handling freight over long distances. It also plays a complementary role to railways in movements of cargo that increased the intermodal share to around 61% in 2004–05 and the share in passenger movement has also witnessed a quantum jump to an estimated 87% of the total traffic by the end of the Tenth Plan. Railways are proudly regarded as better than road transport in terms of energy efficiency, land use, environmental impact, and safety. Indian Railways is a vital force, spanning nearly two centuries. With the largest rail network in Asia and the world's second largest under one management, it is also credited with an essential role in the development of industries and agriculture. Indian railways consist of a vast network of

Service Costing for Transport

125

109,996 km of tracks, 7031 stations spread over a route length of 63,221 km, of which 13,000 km is electrified, and a workforce of 1.54 million that runs around 11,000 trains every day, of which 7,000 are passenger trains. The Indian Railways network binds the social, cultural and economic fabric of the country, and by removing the distance barrier, accelerates the development of industry, agriculture, and the Indian people. India has a long coastline, and the 12 major ports and about 180 minor and intermediate ports handle more than 95% of the trade in India. India is bordered by the Bay of Bengal, Arabian Sea and Indian Ocean and has a coastline of more than 7,000 kms; there is also an extensive network of 14,500 kms of inland waterways and seaports. These waterways attract tourists from all parts of the world, thus promoting Indian travel and tourism. Air transport, being the most modern and quickest mode of transport, has been gaining popularity, however. Domestic air services are serviced by Indian and private airlines while the international airport services in Mumbai, Chennai, Kolkata, and Delhi are serviced by Air India. The government has now very wisely ended the monopoly of Indian Airlines and allowed the entry of private airlines, which has reduced airfares drastically. The recent relaxation on air fuel tax has brought air travel within the reach of a greater section of the Indian populace. India had bilateral air services agreements with 93 countries, owns a fleet of more than 26 aircraft that carry 3.15 million passengers; Indian Airlines operates 57 domestic stations and 17 international stations in 14 countries and operates in 76 destinations, including 16 abroad. The domestic scene is now dotted with private airlines; the international service is however no longer the monopoly of Air India but is in the process of disinvestment of both Indian Airlines and Air India for the betterment of services. Foreign airlines carrying international passenger traffic to and from India were operating long before independence. The number of such airlines has risen to 49, and the share of foreign airlines in India's scheduled international traffic has increased to nearly 72%. An international green airport has been developed in Cochin, Kerala, with contributions from NRIs and loans from financial institutions for the reconstruction of four metro airports (Delhi, Mumbai, Kolkata, and Chennai) and to turn them into world-class airports. It is a key factor for social, regional and economic cohesion, including the development of rural areas. However, the impact of transport on the environment and health remains a major challenge in many aspects of the ecosystem. In addition to these factors, transit time, availability of capacity on alternative modes, quality and reliability of the service, associated costs like warehousing, easy accessibility, the flexibility of operations, door-to-

126

Chapter Five

door service, and reliability have earned an increasingly higher share of both passenger and freight traffic for air transportation.

Basic Classification of Cost Cost classification is the process of grouping costs according to their common features or characteristics. Classification is essential to find the cost of production. Objective of classification of cost: x It helps the management implement cost control and decision making. x It helps calculate the cost of production. x It helps in the valuation of work-in-progress. Element-wise classification Cost classified on the basis of: 1. Material cost 2. Labor cost 3. Expenses Material cost This is “the cost of commodities supplied to an enterprise” (ICMA). Materials are further divided into two parts: (1) Direct materials, and (2) indirect materials. 1. Direct materials are those materials which can enter into and form the finished product. Direct material cost is that which can be conveniently identified and allocated as cost units. 2. Indirect materials are those materials which cannot be conveniently identified with cost units. Expenses Expenses mean the cost of services provided to an enterprise and the notional cost of the use of owned assets. In other words, costs other than the material and labour are called expenses. Direct expenses are those expenses which can be especially incurred in connection with a cost unit, e.g. the hire of a special plant for a particular job. Indirect expenses are those expenses that cannot be directly identified with a particular job.

Service Costing for Transport

127

Overheads An overhead includes indirect labor and indirect expenses. In general terms, overheads comprise all expenses incurred in connection with the supplies and services used by the enterprise, including the maintenance of the capital assets. The main groups may be subdivided as follows: 1. Administration overheads 2. Selling overheads 3. Distribution overheads Function-wise classification: ¾ Administration cost ¾ Selling cost ¾ Distribution cost 1. Administration Cost This consists of all expenses incurred in the direct control and administration of an enterprise. Examples: ¾ Salaries of office staff, accountants, MD, GM ¾ Director fees ¾ Bank charges ¾ Postage, stationary, telephone ¾ Rent rates of office ¾ Insurance of office building and equipment ¾ Depreciation on office building equipment and furniture ¾ Legal charges 2. Selling Cost Expenditures incurred for sales and stimulating demand and for securing orders are known as selling cost. Examples: ¾ Salaries and commission of supervisors ¾ Marketing expenses ¾ Subscription to trade journals and commercial journals 3. Distribution Cost This is expenditure incurred for distributing goods. Examples: ¾ Packaging cost ¾ Loading charges ¾ Dispatch expanses

128

Chapter Five

¾ Finished goods damaged in transit Classification according to behavior Some costs increase or decrease directly according to production; some costs remain unaffected while others change but not in direct proportion to the change in volume of production. These are: 1. Variable costs 2. Fixed costs 3. Semi-variable or semi-fixed costs These costs are in direct proportion to the volume of output; cost per unit will remain the same. If output increases, the total variable cost also increases, and if output decreases, the total variable cost also decreases. Examples: ¾ Direct wages ¾ Power Fixed cost The total fixed costs remain unaffected by the increase or decrease in output, but cost per unit goes on changing: ¾ Rent and rates of building ¾ Depreciation ¾ Insurance ¾ Municipal taxes Semi-variable cost These costs are partly fixed and partly variable and are thus partly affected by fluctuations in the level of activity. Examples: ¾ depreciation ¾ repair and maintenance ¾ telephone expenses Introduction of cost accounting We have entered an era of liberalization in which the development process has opened the doors of the economy, and in a globalized economic environment, it is necessary to protect the interests of consumers, investors, companies, and the country as a whole. In a liberalized economy, there is no place for traditional management in the corporate world; now, only professional management is required to control the costs of present-day organizations.

Service Costing for Transport

129

Cost of service Such intangible charges must in no case be less than the cost of rendering the required service. This should be the lower limit of the freight rate. Service charges ought to be based under monopolistic conditions on the cost incurred in rendering either a particular service or the entire gamut of services. For services like transportation, the ideal system of charging would be to allow a reasonable margin of profit over and above that amount. Some of the factors considered when determining the cost of service are: – Loadability – Susceptibility of the commodity to damage and liability for claim compensation – If special handling is required – The extent to which the commodity may cause damage to other commodities – Quality and regularity of movement Value of service: ™ It is the value of service that determines the utility of the product, customer enthusiasm and the users’ ability to pay. The cost must in no case be more than the value of the service to the customers. This would be the upper limit of the freight rate. ™ In the case of goods, the ability to pay depends largely upon their value. ™ In the case of passengers, it largely depends upon their incomes. For services like transportation, the ideal system of charging would be to allow a reasonable margin of profit based on the income of the target customers. Some of the factors taken into consideration in determining the value of service are: x Value of the commodity at the destination compared with the value at the originating station x Competition from other modes of transportation x Potential competition from new sources of production and new markets x Classification of comparable and related commodities and the switching cost.

Chapter Five

130

Traditional structure for analysis of freight services: • • • • • • • • • • • •

Country-wide uniformity in tariff Uniform telescoping of rates for all commodities No regional, directional, seasonal, or segmental sensitivity Tenuous linkage with input costs Cross subsidization across various commodity groups Unlimited subsidization of losses on passenger services Driven by imperatives of revenue generation Adjustments in tariff arduous and time-consuming Averse to business decisions and steeped in restrictions Oblivious to market conditions and business opportunities for modifications The marginal adjustments are made depending on our perceptions No ab-initio analysis of the cost of operation and fixing of rates accordingly as they cannot be charged equally.

Basics of ascertaining the cost of any services: ¾ Cost being uncertain and fluctuating, none of the fixed charges are stable ¾ Very few of the operating expenses can be assigned ¾ Cost of service rendered will have no relation to the capacity of the commodity to bear it ¾ Thus, it is difficult to find only approximately high positive objectives above the cost ¾ Cost can be known only after the service has been rendered ¾ Another problem is the system of joint costs as it is used for multiple goods and services. It is impossible to base rates on the principle of cost of transportation alone ¾ Cost is of prime importance in the exercise of pricing ¾ Average cost per km declines with distance. It costs less to carry goods for longer distances, i.e. increase in volume reduces the cost per unit. ¾ The element of terminal cost remains the same irrespective of distance ¾ Comparison with the wholesale price index (WPI) measures the annual inflation and gives a good idea of the change in freight rate ¾ Suffers from the absence of relations between service and input costs

Service Costing for Transport

131

¾ Lack of competitiveness because of repeated price hikes in the past or irrelevant introductory pricing for the service The following are included in the calculation of the cost: • Basic data = Type, life, number, capital cost, payload, weight, lead cost, turnaround cost, and return ratio • Documentation = Cost of processing and handling, cost of ancillary services • Line cost = Terminal cost, cost of transaction per unit, cost of other transportation services per unit, cost of scheduling per unit, cost of tracking per unit, total line cost Provision and maintenance cost: – Cost of repair and maintenance – Interest on the capital cost of the wagon – Depreciation element – Total provision and maintenance cost Total direct cost (sum of all the above): – General overheads. – Central charges. – Inflation rate in context to the Index – Fully distributed cost (FDC): Logistic cost, cost of warehousing, transportation cost, loading and unloading cost, and storage For users, service fares are mainly decided based on administrative reasons: • While some of the upper-class services are priced on the higher side, the suburban services are probably the cheapest in the world while fares for general services are underpriced. • Inadequate appreciation of what the customer can pay. No formalized mechanism to identify customer needs and perceptions. • Consequent unfettered expenditure on passenger amenities with loosely defined standard effects pricing.

Chapter Five

132

• • • • • • • •

Losses on services are not transparent as the suburban services are highly subsidized. The suburban subsidy is to be limited by way of percentage discount of freight services. Suburban fares should be indexed to input fuel costs to eliminate losses. Suburban business may continue to need partial and controlled subsidization. Discrepancy between the highest and the lowest needs to be reduced. Variable pricing to be introduced for revenue generation. Subsidies to businesses must be capped in financial terms for transparency. Products and prices need to focus sharply on the target segment. 10% for loss of path should be accounted for and added to the total cost. A profit margin of at least 20% should be added as well as a contribution margin. These incomes are utilized for the operation of internal resources.

Cost to the operator comprises the cost of operation of the service, repair and maintenance of infrastructure and moving units, overheads, replacement costs, and investments in up-gradations of the system. The user cost structure varies with mode. User cost in the case of goods transport by rail relates to the packing of goods, cartage (local transit) from consignor’s godown to loading terminal at origin and from unloading terminal to consignee’s godown at the destination, handling of goods at either end, transit losses, and rail siding and transit inventory costs. Cost elements are similar in the case of coastal shipping and airways except that rail siding costs are excluded. In the case of road transport, which provides door-to-door service, railway siding costs and local transit costs are not relevant. For passengers, user cost includes the cost of ingress and egress in the nature of local travel and porterage at the terminals at either end. The sum of the two cost components, i.e. operator and user cost, reflects the total cost of transport of a ton of goods or a passenger by a particular mode for an identified distance. Further, costs are conceived in terms of financial costs and economic or resource costs. Financial costs include the total expenditure actually incurred by an operator or user, inclusive of taxes, duties and other elements reflecting market imperfections. There are also modal variations in cost inputs, like the cost of the way. While railways provide the rail tracks, in the case of highways, it is the central and state governments that bear the cost of maintenance of the roads. As for coastal

Service Costing for Transport

133

shipping and airways, seaside facilities and airports are also funded and maintained by the government. When converting financial costs into economic/resource costs, transfer payments in terms of subsidies, taxes and duties are excluded. Unlike financial costs, economic/resource costs incorporate elements of social costs in terms of pollution and accidents. The economic/resource costs are thus worked out as: Resource Cost = Financial Cost * Shadow Price Factor + Social Cost, as per Planning Commission Total Transport System Study, Chapter 5: Modal Costs 5.2 In the context of long-term planning for the transport sector, long-run marginal costs are relevant. When assessing the long-run marginal cost, it is assumed that all the costs incurred are variable. Operator cost data are usually obtained from the operators. In the movement of passengers and goods, the costs incurred are different for various modes of transport. Thus, the study must estimate the operations, maintenance and capital costs for the various modes of transport. Even the operational costs and capital costs estimated for each of the modes of transport vary. The main difficulties in rail costing are the joint nature of costs incurred in different operations, huge sunk costs and the non-linearity of growth expenditure to outputs. Likewise, rail transport costs, unlike road, are characterized by high fixed costs of rails, locomotives and rolling stock, and buildings, but lower per unit fuel and operating costs as trains can carry large volumes. Moreover, these fixed (mostly infrastructure and some workforce) costs and variable operating costs are joint costs that must be allocated between several kinds of products and services before the total cost of each service or product can be calculated. In order to facilitate dynamic decision making regarding investment in infrastructure, operations and pricing for various modes of transport, the system of costing should be able to allocate fixed and variable elements of cost separately, thereby enabling evaluation of whether it is profitable to continue or start different services and also how much to charge for them. It may not be necessary, for instance, to charge all the costs for a particular service if all the fixed costs are being recovered from some other source. Usually, in services, one may justify only recovering a margin of profit element over and above the fully distributed cost. The costing procedure is only an approach that facilitates determining the marginal cost for providing additional services, which is necessary for a comparison of the cost of service by different modes of transport as per their requisition.

134

Chapter Five

The terms of reference for costing The costs are usually related to networks carrying cargo or passengers so differences in the costs of moving cargo for different types of commodity, routes, distribution etc. are clear, and in case of passengers, the distance and the class of travel matters. The present costing exercise involves the central objective of calculating the fixed cost and the variable costs for each category of service, i.e. goods and passenger. Fixed costs include the capital costs of tracks, locomotives, rolling stock, and signaling, the fixed element of maintenance of infrastructure, and the labour element of operating costs. Variable costs that vary with output consist of maintenance and operating costs that may be directly attributed to the service or which may be joint costs for several services, which must be divided between goods and passenger services. A basic schematic of the various steps involved in the costing process is the estimation of unit operations, maintenance costs, and capital based on expenses, performance data, and the escalation of unit costs (incremental cost). The statement of cash flows is considered for the exercise of costing, and cash outflows are accounted mainly by operational activities and capital investment. The assessment of resource cost is of prime importance and is evaluated by adding the shadow pricing factor to the financial cost. A similar methodology is used for estimating passenger costs.

Estimation of Cost Per Unit Using Service Costing Capital assets are acquired and used on a continual basis, so estimating the cost of capital for a particular year becomes difficult. The issue is further complicated as the study must adopt a uniform method for calculating capital costs for all the modes. Considering the data availability in different modes of transport, the study team decided to estimate capital costs by assuming that all assets are acquired or built-in and adding the annual cost of using the capital assets assessed by three different methods. First, the annual depreciation of the asset is arrived at by dividing the asset life by the number of life years, assuming a straightline method of depreciation, which varies according to the mode of transport. The capital cost for railways is a one-time investment as the equipment is used for a longer duration; this is the reason for the high fixed cost in this mode of transportation. This approach de-links the financing of the capital assets from their utilization, an issue relevant from a policy perspective. In the second approach, the annual depreciation is

Service Costing for Transport

135

increased by adding interest to the capital. One more method uses the capital recovery factor approach, where interest on capital and depreciation are simultaneously considered to arrive at a fixed annual value; e.g. if the primary objective is to stimulate cargo flow on the transport network, then it is imperative to relate the unit costs for the different sections of cargo. Such variables have a direct impact on the annual capital cost. Both capital and operation costs vary based on the number of passengers or the quantity of the commodity. The unit costs are then converted to cost per tonne-km (tkm) for freight services and cost per passenger-km (pkm) in the case of coaching services by developing relevant factors. Commoditywise costs were identified as varying by three important cost drivers – the percentage of distance run empty after unloading or going to load a cargo (referred as empty return ratio), the average quantity loaded in a wagon, and the average lead for the cargo. While the quantifiable costs are worked out by using element-wise ongoing market prices, the non-quantifiable costs are estimated on a normative basis whenever the norms are developed. While the vehicle operating costs are directly borne by the service providers or the vehicle owners, the user costs are incurred by the users of the service before the actual start of the modal transportation as well as after the completion of the transport service to derive at the total transport costs. The other element of vehicle operating costs relates mainly to packaging, handling, local cartage, inventory, etc. in the goods transport sector; and for passenger transport, it relates to the distance travelled by the passenger from their actual place of start (stay) to the end terminal, which is considered their final destination. To develop the vehicle operating cost (VOC), item/element-wise and category-wise data were interpolated to bridge the gaps, if any. Further, VOC was divided into time-related and running costs. Time-related costs These costs include expenditure such as capital, crew salary, insurance, taxes (goods & road), overheads, etc., which are incurred by the operator irrespective of the frequency of movement. In view of the fact that capital investment is a one-time cost which needs to be recovered by the entire performance of the vehicle, annualized costs were estimated using the cost recovery factor (CRF) technique. Vehicle taxation Regarding the existing vehicle taxation system, information on vehicles with different tax options was collected. Since it was not feasible to segregate the sample based on tax options, an overall tax for various categories of vehicles operating on different distance ranges was not considered as these are financial costs.

136

Chapter Five

Crew costs To estimate the vehicle crew cost relating to different types of vehicles, information was collected from a sample crew (private sector only) was adopted, keeping in view their overall share in the road transport market. Monthly allowances, such as uniform allowance, festival allowance, dearness allowance, if any, are already included under the salary, which comes under crew costs, as we were unable to get a bifurcation of these expenses. Vehicle insurance It is obligatory to get vehicles insured before they are put on the road. The insurance charges vary from vehicle to vehicle, depending on various factors. In the current study, the insurance paid by the operator for different categories of vehicle was considered as it is a finance cost, which is not part of any of the techniques used under the costing. Overhead costs In this study, the overhead expenditure reported by the multi-vehicle operators as well as the single-vehicle operators on staff who do not work as vehicle crew members but provide necessary services for vehicle operations has been included in the time-related cost estimates. The following are the overhead costs. Running costs The costs borne by the operator relating to vehicle movement are also considered as running costs, i.e. fuel, mobile oil, repairs and maintenance (all types), tyres and tubes, toll charges, trip allowances or “bhatta” to the crew, and other wayside expenses. Fuel costs Expenditure on fuel is one of the major cost elements of vehicle operations; diesel is the main fuel used in the goods and passenger vehicles. Although the unit price of diesel is fully controlled by the central government, the cost per unit is charged differently in different states after adding the local state taxes. In this exercise, the actual cost incurred by the operator was collected and incorporated to arrive at a per-unit transport cost. Efforts were also made independently to estimate the consumption of the fuel cost according to the frequency of trips in a particular route and the cost variations on account of the road conditions. Mobile oil and lubricants cost This cost varies in proportion to the rate of consumption of fuel. In order to reflect their impact on different road and vehicle conditions, mobile oil and lubricant costs are considered independent of the repair and maintenance costs.

Service Costing for Transport

137

Vehicle repair and maintenance cost (R&M) Repair and maintenance costs are another major expenditure incurred by the vehicle operator on a regular basis. The fact that newer vehicles require less repair and maintenance expenditure, more so if the periodical overhaul for longer durations, which involves a sizeable expenditure, is undertaken every two or three years, affects the cost of performance irrespective of the vehicle category. Tyres and tubes cost Like repair and maintenance, expenditure on tyres and tubes is another important expense. Nowadays, with the growing number of multi-axle vehicles on the road, the expenditure on tyres and tubes is more than the repair and maintenance cost. While estimating overall costs on tyres and tubes, resoling costs and the resale value obtained by the operator, if reported, have also been considered and included under the cost of scrap, which is the disposal value. The frequency of trips, loads and speeds affect the longevity of the product, which is directly proportional to this account. Trip allowance for the crew In addition to salary, crews are given a daily allowance (bhatta) to meet their day-to-day expenses while on the road. In the majority of cases, the amount is authorized by the owner of the vehicle on a daily basis as part of the en-route expenditure, which is added to the operating expenditure. This is a strategy to attract a better performance from the operators, and it may be different for different routes /types of carriage/types of vehicle as it is pertinent to note that impacts the total cost. The days the vehicle is laid-off due to major repairs or non-availability of loads, the operator continues to pay the daily allowance to the vehicle crew. In this exercise, the reported daily allowance (as) was included as part of the VOC. Other operating costs Costs such as en-route octroi charges, weighbridge charges, commissions paid to a middle agency for arranging loads (cargo), and minor repair charges are included under this heading. These costs are incurred by the driver and are different on different routes. Whenever the cost of any other item reported, such as the purchase price of a chassis or body fabrication incurred due to the rough usage of vehicle, age of the vehicle, maintenance/servicing of the vehicle, etc. affects the efficiency and productivity of the vehicle, it is included in the total operating cost. Information on the average loading, unloading time and charges for each commodity, average load carried by various type of vehicles, number of vehicle running hours, actual running speed (through test journey surveys), different routes etc. matters for the estimation of the total cost.

138

Chapter Five

Overall operating overheads Although goods and passenger transport use similar types of vehicles and perform on the same infrastructure, their operations are not similar. Moreover, in the goods sector, private operators play a significant role whereas the public sector is more effective in the passenger transport sector for various reasons. In light of this, when estimating vehicle operating cost norms, goods and passenger sectors are considered independently. Vehicle operating costs have been estimated to reflect the entire spectrum of costs borne by the vehicle owners/operators as service providers. Since these costs vary under different operating conditions /routes (road condition, climate, the internal environment of the area), quality of the vehicle, commodity handled, etc., an attempt has been made to distinguish the cost structures that reflect all these operating expenses. In order to estimate the relative vehicle operating costs under different operating conditions, keeping in view the predominance of the goods transport sector, information on vehicle performance and cost particulars related to distance, speed, consumption of fuel per kilometer, etc. were gathered. The information was collected via personal interviews with the crew and data on reverse-hold goods in the case of passenger transport sector. The nature of a commodity is classified as light, normal or heavy, depending on the impact on loadability. Further, the average loadability of commodities also varies under different terrain conditions. For example, heavy commodities such as iron ore, other ores, coal, cement, iron and steel, etc. have the tendency to be overloaded; the light commodities, on the other hand, represent those commodities that have either low or no overloading tendency, i.e. wood, fruit and vegetables, tea, POL products, fodder, jute, cotton, etc. The commodities under the normal group are generally carried in standard bags, and as a result, operators are able to decide the extent of load they can carry. Annual time-related and running costs were estimated separately to arrive at the overall VOC per tonne-km (the final output). As discussed earlier, the time-related costs are distributed over the total vehicle running hours, which are attributed to the trip on the basis of the overall distance involved and the average speed. The running costs are distributed over the total performance of the vehicles to arrive at a per vehicle-km cost. Both the time-related and running costs are further distributed over the average load carried by the vehicle to arrive at a per tonne-km cost. In order to estimate the total transport system cost, all the cost elements were considered independently for the total summation of the cost incurred per route per trip; an estimation of the cost per kilometer per

Service Costing for Transport

139

passenger was also calculated. A similar approach was adopted to estimate the vehicle-operating cost of the passenger. Keeping in view the predominance of ordinary buses in the total bus population, this exercise was limited to this category only. Based on relevant norms, item-wise costs were estimated, except for the periodical taxes. In the case of passenger transport, passenger taxes that are not paid periodically, like goods tax, do not form part of the passenger bus VOC. Passenger tax is charged by the conductor as a part of the fare and transferred to the government revenue on completion of the trip, so it is not considered. The average cost per passenger was estimated based on the capacity utilization of the bus. For the estimation of cost in the case of passenger transport, unlike the goods sector where the VOC is directly applicable to O-D flows, normative costs for 18 different distance slabs were estimated. Users’ cost in the case of passengers relates to the cost of the movement of the passenger from their place of stay at origin to their destination. The vehicle operating costs of various modes of local transport were estimated using the methodology adopted to estimate bus operating costs.

Analysis Using Service Costing Table 5.1 Analysis of Cost Per Passenger Per Trip for 5 Routes Trips km

Routes Particulars

1 712

Nagpur to Pune

Diesel

2,111,525

Engine Oil Grease Depreciation Wages OPERATING COSTS Tyres & Tubes Employee Benefit Expenses Repairs MAINTENANCE COSTS Salary Insurance Gen Supervisor

109,149.6 3840 225,180 24,000 2,473,695 51,976 610,270.4 180,000 842,246.4 180,000 12,000 120,000

1 507 Bengal uru to Bagalk ot 1,503,5 72 77,723. 1 3840 225,180 24,000 1,834,3 15 37,011 610,270 .4 180,000 827,281 .4 180,000 12,000 120,000

1 837

1 570

1 980

Pune to Bengaluru

Hyderabad to Bengaluru

Mumbai to Bengaluru

2,482,228

1,690,406

2,906,313

128,312.1 3840 225,180 24,000

87,381 3840 225,180 24,000

150,234 3840 225,180 24,000

2,863,560 61,101

2,030,807 41,610

3,309,567 71,540

610,270.4 180,000

610,270.4 180,000

610,270.4 180,000

851,371.4 180,000 12,000 120,000

831,880.4 180,000 12,000 120,000

861,810.4 180,000 12,000 120,000

Chapter Five

140 FIXED COST

312,000

312,000 2,973,5 Total 3,627,941 96 87,458. Cost Per Passenger Per Trip 106,704.1 72 Different Costs per km and per passenger: 106.411 Operating 102.185 1 Maintenance 34.79 47.99 Fixed 12.89 18.10 Total 149.87 172.50

312,000

312,000

312,000

4,026,932

3,174,688

4,483,377

118,439.2

93,373.17

131,864

100.6241 29.92 10.96 141.50

104.7888 42.92 16.10 163.81

99.32673 25.86 9.36 134.56

Table 5.2 Analysis of Cost Per Passenger Per Trip for 5 Routes Trips km

Routes

1 530 Bengaluru to Bagalkot

1 587 Mumbai to Goa

1 575 Mumbai to Hubballi

1 556 Goa to Bangalore

2 432 Pune to Hubballi

1,571,781 81,249 3840 225,180 24,000

1,740,822 89,987.1 3840 225,180 24,000

1,705,234 88,147.5 3840 225,180 24,000

1,648,888 85,234.8 3840 225,180 24,000

2,562,300 66,225.6 3840 225,180 24,000

1,906,050

2,083,829

2,046,402

1,987,142

2,881,546

38,690

42,851

41,975

40,588

31,536

610,270

610,270

610,270

610,270

610,270

180,000

180,000

180,000

180,000

180,000

828,960

833,121

832,245

830,858

821,806

180,000 12,000 120,000 312,000 3,047,011

180,000 12,000 120,000 312,000 3,228,950

180,000 12,000 120,000 312,000 3,190,647

180,000 12,000 120,000 312,000 3,130,001

180,000 12,000 120,000 312,000 4,015,352

89,618

94,969.1

93,842.6

92,058.9

23,6197

Particulars Diesel Engine Oil Grease Depreciation Wages OPERATING COSTS Tyres & Tubes Employee Benefit Expenses Repairs MAINTENANCE COSTS Salary Insurance Gen Supervisor FIXED COST TOTAL Cost Per Passenger Per Trip

Service Costing for Transport Different Costs per km and per passenger: Operating Cost 105.774 104.411 Maintenance Cost 46.0022 41.7437 Fixed Cost 17.3141 15.6328 Total 169.091 161.787

104.675 42.5701 15.9591 163.205

141

105.118 43.9515 16.5044 165.574

196.184 55.9509 21.2418 273.376

Table 5.3 Analysis of Cost Per Passenger Per Trip for 5 Routes Trips km

2 385

2 342

2 333

2 411

Gadag to Bengaluru

Pune to Belagavi

Bengaluru to Hospete

Pune to Dharwad

Diesel 1,444,259 2,283,531 Engine Oil 74,657.1 59,020.5 Grease 3840 3840 Depreciation 225,180 225,180 Wages 24,000 24,000 OPERATING 1,771,937 2,595,572 COSTS Tyres & Tubes 35,551 28,105 Employee Benefit 610,270 610,270 Expenses Repairs 180,000 180,000 MAINTENANCE 825,821 818,375 COSTS Salary 180,000 180,000 Insurance 12,000 12,000 Gen Supervisor 120,000 120,000 FIXED COST 312,000 312,000 TOTAL 2,909,758 3,725,947 Cost Per Passenger Per 85,581.1 219,173 Trip Different Costs per km and per passenger: Operating Cost 107.014 198.287 Maintenance 49.8745 62.5191 Cost Fixed Cost 18.8429 23.835 Total 175.731 284.641

2,028,488 52,428.6 3840 225,180 24,000

1,975,106 51,048.9 3840 225,180 24,000

2,437,744 63,006.3 3840 225,180 24,000

2,333,936

2,279,175

2,753,770

24,966

24,309

30,003

610,270

610,270

610,270

Routes

1 487 Mumbai to Belagavi

Particulars

180,000

180,000

180,000

815,236

814,579

820,273

180,000 12,000 120,000 312,000 3,461,173

180,000 12,000 120,000 312,000 3,405,755

180,000 12,000 120,000 312,000 3,886,044

203,598

200,339

228,591

200.717

201.305

197.064

70.1098

71.9466

58.7

26.8318 297.659

27.557 300.809

22.3272 278.091

142

Chapter Five

Table 5.4 Analysis of Cost Per Passenger Per Trip for 3 Routes Trips km

Routes

1 504 Hyderabad to Hubballi

2 404 Udupi to Bangalore

1 545 Gokak to Bangalore

2,396,225 61,933.2 3840 225,180 24,000 2,711,178 29,492

1,616,266 83,548.5 3840 225,180 24,000 1,952,834 39,785

610,270

610,270

180,000 819,762 180,000 12,000 120,000 312,000 3,842,941

180,000 830,055 180,000 12,000 120,000 312,000 3,094,890

226,055

91,026.2

197.378 59.6799 22.714 279.772

105.388 44.7952 16.8376 167.021

Particulars Diesel 1,494,675 Engine Oil 77,263.2 Grease 3840 Depreciation 225,180 Wages 24,000 OPERATING COSTS 1,824,958 Tyres & Tubes 36,792 Employee Benefit 610,270 Expenses Repairs 180,000 MAINTENANCE COSTS 827,062 Salary 180,000 Insurance 12,000 Gen Supervisor 120,000 FIXED COST 312,000 TOTAL 2,964,021 Cost Per Passenger Per 87,177.1 Trip Different Costs per km and per passenger: Operating Cost 106.499 Maintenance Cost 48.2646 Fixed Cost 18.2073 Total 172.97

Observation & Analysis From the overall findings, we find that the operating costs for all routes are 25% on average, but the maintenance costs differ as per the distance and number of trips on that particular route, which is an average of the costs per km and per passenger. As per table 1, the operating cost fluctuates at an average of 25% for all routes, and maintenance cost fluctuates at an average of 36%, with the operating cost for route Bengaluru-Bagalkot the highest of them all. As per the findings, the operating cost is high for the Mumbai – Bengaluru route, but as more kilometres are travelled along this route, the impact on operating cost per km and per passenger is less. Similarly, table 2 shows the operating cost fluctuates at an average of 25% for all routes and maintenance cost fluctuates at an average of 54.69%. The operating cost for the ChennaiBengaluru route is the highest of them all. As per the findings, the operating cost is high for the Pune – Amravati route, but as more

Service Costing for Transport

143

kilometres are travelled along this route, the operating costs per km and per passenger are less. Table 3 shows that operating cost is an average of 25% for all routes, and the operating cost for the Pune-Hubballi route is the highest but also the longest, so this reduces the cost per passenger. As per the findings, the maintenance cost is an average of 46%. Table 5.4 shows the fluctuations in the operating costs and maintenance costs routewise. The operating cost fluctuates at an average of 25% for all routes and the maintenance cost at an average of 62%. The operating cost for the Bengaluru-Hospet route is the highest. As per the findings, the operating cost is high for the Mumbai – Belagavi route, but as the route is longer, it reduces the operating cost per km and per passenger. Table 5.5 shows the fluctuations for the operating costs and maintenance costs route-wise. The operating cost fluctuates at an average of 25% for all routes and the maintenance cost at an average of 51%. The operating cost for the Udupi–Bengaluru route is the highest. As per the findings, the operating cost is high for route Gokak – Bengaluru, but as this route is longer, the operating costs per km and per passenger are less. ¾ Among the classifications of cost, the highest operating cost is 71%, the highest maintenance cost is 21%, and the highest fixed cost is 8% 9 TThe price of diesel and engine oil have a direct impact on the operating costs 9 TThe price of tyres and tubes have a direct impact on the maintenance costs and its usage causes fluctuations in the cost.

Chapter Five

144

Table 5.5 Showing Classification of Cost in Ascending Order Routes

Operating

Maintenance

Fixed

Mumbai to Bengaluru

99.326727

25.86

9.36

134.56

Pune to Amaravati

100.56081

29.72

10.89

141.17

Pune to Bengaluru

100.62409

29.92

10.96

141.50

Nagpur to Pune

102.18501

34.79

12.89

149.87

Mumbai to Goa

104.41071

41.74

15.63

161.79

Mumbai to Hubballi

104.67529

42.57

15.96

163.20

Hyderabad to Bengaluru

104.78882

42.92

16.10

163.81

Goa to Bengaluru

105.11756

43.95

16.50

165.57

105.3877

44.80

16.84

167.02

Bengaluru to Bagalkot

105.77416

46.00

17.31

169.09

Bengaluru to Bagalkot

106.41113

47.99

18.10

172.50

Hyderabad to Hubballi

106.4985

48.26

18.21

172.97

Mumbai to Belagavi

107.01392

49.87

18.84

175.73

Hyderabad to Goa

111.47252

63.80

24.34

199.61

Pune to goa

195.71809

54.50

20.67

270.88

Gokak to Bengaluru

Total

Pune to Hubballi

196.18366

55.95

21.24

273.38

Bengaluru to Dharwad

196.30413

56.33

21.39

274.02

Pune to Dharwad

197.06384

58.70

22.33

278.09

Udupi to Bengaluru

197.37757

59.68

22.71

279.77

Gadag to Bengaluru

198.28662

62.52

23.83

284.64

Chennai to Bengaluru

200.40336

69.13

26.45

295.98

200.7169

70.11

26.83

297.66

201.305

71.95

27.56

300.81

Pune to Belagavi Bengaluru to Hospete

Tuesday, September 06, 2011 INDRA GHOSH, Adviser/Rates Slide No. 59

Target Costing for Better Decision Making The long-term financial success of any business depends on whether its prices exceed its costs by a large enough increment in the form of financial growth to provide for reinvestment and yield a satisfactory return to its stakeholders. As competition increases, and supply exceeds demand,

Service Costing for Transport

145

market forces significantly influence prices. To achieve a sufficient margin over its costs, a company must manage those costs relative to the prices the market allows or the price the firm sets to achieve certain market penetration objectives. The problem that firms face is that the prices are set by the market forces and the shareholders decide the profits. Therefore, firms have no other option but to set the cost and achieve it. The practice of target costing has evolved in the context of these characteristics. Target costing is a fundamentally different way to look at the relationship between prices and cost. The basic target equation of “Priceprofit margin=cost” means that prices are driven and set either by competitive market forces or by the firm as it aggressively lowers its price to increase market penetration, profit margins are established such that the firm can make money, and allowable costs are derived from prices and margins. This method was pioneered by Toyota in the 1960s to achieve high quality and desirable features at a competitive price. Target costing practice (Genka-kikaku in Japanese) seeks to produce, given the firm’s technology and the state of its accumulated knowledge, without compromising its profitability. The balancing of costs, features and quality takes place throughout the design, manufacturing, sale, and service. However, its target costing has the strongest influence during the design phase as the cost consequences of the manufacturing method and features selected are mostly determined during the design phase of the product. Target Cost = Selling price – profit margin OR Target Price = Cost + target profit margin The allowable cost is the total product cost the firm must achieve and is dictated by consumer willingness to pay and market competition. The desired profit margin is driven by corporate strategic profit planning. In reality, the allowable cost might not be achievable in the short run, and so the target cost is revised upward. The target cost estimate is first determined based on the best estimate of the future product’s costs and compared with the target cost, and the gap constitutes the subject of the cost reduction program. The excess of the estimated cost over the target cost is reduced by management tools like value engineering. For example, the current cost estimates of the final product may be INR 100,000 while the target cost determined through market research and strategic analysis maybe INR 80,000 which leads to a target cost reduction of Rs.20,000, i.e. 20%. The same is achieved by dividing the gap into cost reduction targets for various business functions. Each function then redesigns its component of the product or re-engineers the manufacturing and/ logistics process (i.e.

146

Chapter Five

Just in time) to achieve the desired target cost estimate. The redesigning process is called value engineering, which is basically concerned with looking for alternatives to designing a product with the same or a greater level of quality/ functionality while reducing the cost. The process undergoes numerous iterations before the final product is within the targeted cost.

Target Costing: An Integration The management decides whether increased functionalities are to be provided at the same cost or the same functionalities are to be provided at a reduced cost. If the firm has positioned itself as a cost leader, then the firm will have to focus on attaining target cost, but if the firm has positioned itself as a differentiator, then it will focus more on functionalities than on the cost. Once the target cost is decided, then it cannot be achieved without incorporating it in each step of the supply chain. As can be seen, all supply chain management has three components: suppliers, producers and customers. As the various components of the supply chain are integrated, an increase in costs in one part of the chain will increase the costs of other components too and, as a result, the overall cost of the product/service increases. Therefore, cost management must be carried out in all components of the supply chain, and value is added in each activity along the chain. Thus, costing takes into account every facility that has an impact on cost and ensures that the product conforms to customer requirements. For example, when designing a new car model, the development team may reduce certain features to reduce the product cost without taking into account the impact on the logistics or supply chain, which may lead to higher costs of transportation or storage. The same approach also overlooks opportunities for cost reduction in the supply chain that may have given the design team more flexibility in meeting their cost targets. A decision may be taken whether to outsource a particular part or to manufacture it in house. Target costing would be much more effective for meeting such companies’ strategic objectives. Co-ordination is essential here. Therefore, while target costing may serve as a solution when developing new products, minimizing costs through the optimal use of all resources along the entire supply chain would be a better strategy. The current practice involves the use of target costing to reduce costs, thereby focusing the entire chain towards the overarching goal of eliminating costly waste, excess and unevenness. Thus, adopting the target costing approach would

Service Costing for Transport

147

involve selecting the most appropriate product development and process technologies, minimizing the complexities of product lines, eliminating cost overruns, limiting design problems, and delivering the lowest-priced, highest-valued product to the final customer. In the transport business, the target profit margin can be added to the actual cost per kilometer per passenger to deliver an appropriate value price to the passenger, which should be reasonable. To take the example of Tata Nano – the people's car – in which cost and waste were lowered all along the supply chain by reducing inventory, eliminating waiting times and delays, increasing the utilization of warehouses and trucks, optimizing the location of warehouses and plants, drawing up the optimum transportation network, utilizing backhauls, etc. Reducing inventory reduced the working capital, warehousing and obsolescence costs. To reduce inventory, demand fluctuation was reduced, the reliability of inventory replenishment was increased, and the supply chain length was reduced. Reducing supply chain times reduced inventory and increased responsiveness. To eliminate waiting times and delays, the complete supply chain process was mapped. For this, a lead time map was used so delays like waiting for loading or unloading and waiting for documents were minimized and transit time was reduced. Truck utilization was improved by using truck optimization software. On a strategic level, supply chain network design locating plants, contract manufacturers, distribution centres and warehouses are all important because 70% of the cost of a supply chain is fixed at the design stage itself. So, Tata Nano created a breakthrough by significantly reducing the cost of a car by strategically managing cost at each level of the supply chain.

Conclusion The objective of costing is to be efficient and cost-effective across the entire system, taking into account system-wide costs, from transportation and distribution to the inventories of raw materials, works in progress, and finished goods. Costing strategies are directly affected by the development chain, which is defined as the set of activities and processes associated with product manufacturing and includes decisions on product designs, i.e. product architecture, what to make internally, and what to outsource, supplier selection, early supplier involvement, and strategic partnerships. Thus, decisions taken during the development chain impact the supply

148

Chapter Five

chain and the characteristics of the supply chain impact product design strategy and, thus, the development chain. The estimation of cost does not require breakthroughs or regulations in the initial stage but prior to it; it simply requires a new way to accurately measure costs and compare them with the outcomes. By using service costing, we were able to evaluate the total cost per passenger per trip. The cost of operating, maintenance, and fixed and total cost per km and per passenger were assessed. We were able to observe that the BengaluruHospete route is the most expensive, followed by the Pune-Belagavi route. Target costing is a more powerful path to creating value-based competition on results and one of the strategies used to reform the value-based system. It is a more powerful management tool aimed at accurate and higher profits. Integrated cost systems are driven by profitability and performance. This integrated system understands looking at the total cost over the complete cycle of activities; it can contemplate innovative reimbursement approaches without fear of sacrificing their financial sustainability. Accurate costing allows the impact of process improvements to be readily calculated, validated, and compared. These approaches target cost reductions in areas where real improvements in resource utilization and process efficiencies enable organizations to spend less without having to compromise quality. The operating cost of transport can be managed by increasing the distance of the route or by increasing the number of passengers travelling. The alternate is to opt for the strategy of cost reduction or control the total cost by eliminating unwanted costs.

References Desai, Vasant (1996), The Entrepreneur, Entrepreneurship and Development. Vol. 1, Himalaya Publishing House, Mumbai. Desai, Vasant (1996), Project Formulation for Small Industry: Formulation Appraisal and Financing. Vol II, Himalaya Publishing House, Mumbai. Desai, Vasant (1996), Institutional Infrastructure: Programmes and Performance. Vol. III, Himalaya Publishing House, Mumbai. Hisrich, D. Robert and Peters, P. Michael (2002), Entrepreneurship. Courier Westford, Berlin. Katz, L. Robert (1970), Management of the Total Enterprise. PrenticeHall, New Jersey. Kuratko, F. Donald and Hodgetts, M. Richard (2007), Entrepreneurship: Theory, Process, Practice. Thomson Publishers, Australia.

Service Costing for Transport

149

Kenichi, Miyashita and David, Russell (1994), Keiretsu – Inside the Hidden Japanese Conglomerates. McGraw-Hill, New York. Parson, Mary and Culligan, J. Mathew (1985), Back to Basics: Planning. Jaico Publications, New York. Journal of Accounting and Finance, Vol. 24, April–September 2010. Journal of Management and Entrepreneurship, Vol. 3, Issue 1, January– March 2010. Journal of Management and Entrepreneurship, Vol. 3, Issue III, July– September 2011. The Management Accountant, Vol. 46, No. 9, September 2011.

BIBLIOGRAPHY

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

Benchmarking in Higher Education: An International Review, Commonwealth Higher Education Management Service, 1998. Harvard Business Review on Advances in Strategy, Harvard Business School Press, Boston, 2002. Higher Education in India: Issues related to Expansion, Inclusiveness, Quality and Finance, UGC, New Delhi, India, 2008 Higher Education in India: Strategies and schemes During 11th and 12th Plan Period for Universities and Colleges, UGC, New Delhi, 2011. Salim, A. Abdul, The Cost of Higher Education in India, Anmol Publications Pvt. Ltd., New Delhi, India. Mitra Amit & Jhingan, “Making the Indian Higher Education System Future Ready, Ernst & Young, 2010. Alex Anajana, Public expenditure on school education in Kerala: A Cost-Benefit Analysis, Centre for Civil society, 2005. De Anuradha & Endow Tanuka, “Public expenditure on education in India: Recent Trends and Outcomes, Research Consortium on Educational Outcomes and Poverty, 2008. Apte M. D., “Education and Unemployment in Kerala”, Economic and Political Weekly, No. 12, July 1975. Gupta Arti, Management of Higher Education, Anmol Publication Pvt. Ltd., New Delhi, 2002. Guidelines for Costing of Australian TAFE Activities with Particular Reference to International Activities, Australian TAFE International, 1996. Azad, J. L., Financing of Higher Education in India, Sterling, New Delhi, 1975. B. M. Lallinigam & I.C. Jain, Cost Accounting: Principles and Practice, PHI Private Ltd., New Delhi, India, 2009. Balachander K. K., “Higher education in India: The shifting perspective”, University News, AIU, No. 12, 1988. Berry R. H. “Management accounting in universities”, CIMA, 1994. Bohlander Snell, Managing Human Resources, Thomson SouthWestern, USA, 2004.

Costing for the Service Industry

17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35.

151

Bradshaw J. & Holmberg G., “Cost allocation in higher education”, Public Finance and Accountancy, 1993. Brimson J. A., Activity Accounting – An Activity-Based Costing Approach, John Wiley & Sons, USA, 1991. Burch, John G., Cost and Management Accounting – A Modern Approach, West Publications, 1994. Burke J., “Why higher education must learn its ABC”, Public Finance & Accountancy, 1989. Burn, Barbara, et al., “Higher Education in 9 Countries: A Comparative Study of College and Universities Abroad”, McGraw Hill, London, 1971. Carnegie Commission on Higher Education, Who Pays, Who Benefits, Who Should Pay, A report & recommendations by the Commission, McGraw Hill, London, 1982. Chris H. Durden & David R. Upton, “Cost accounting and performance measurement in a just-in-time production environment”, Asia Pacific Journal of Management, vol. 16, 1999. Chunawala & Pate, Production & Operation Management, HPH publishers, Mumbai, India, 2004. Cohn, E., Economics of Education, Lexington, London, 1972. Commonwealth Competitive Neutrality – “Guidelines for Managers”, Australian Government Printing Services, 1998. David Asman & Adam Meyerson, The Wall Street Journal of Management, UBS Publishers, New Delhi, 1991. David Dooley, The Art & Science of Financial Management: Cost Control, Crest Publishing House, New Delhi, 1999. Debashis Sarkar, Lesson in Six Sigma: 72 Must-know Truths for Managers, Response Books, New Delhi, India, 2004. Dey B., On Costing of Education, Pandit H.N. (ED.) Dr. Davood Askarany, Technological Innovations, ABC and Satisfaction, New Zealand, 2006. Dr. C. N. Sudarshan, Government Budgeting, Sree Sudarshan Publisher, Chennai, India, 2001. Dr. C. Selby Smith. The Cost of Further Education: A British Analysis, Pergamon Press Ltd., Oxford, USA, 1970. Dr. Johnson M. Ishengoma, Cost Sharing and Participation in Higher Education in Sub-Saharan Africa: The Case of Tanzania, UNESCO, Paris, 2004. Dr. Noor Azizi Ismail, Activity-based Management in Higher Education: Can It Work?, University Utara, Malaysia.

152

36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54.

Bibliography

Edited by P. R. Trivedi, U. K. Singh & K. N. Sudarshan, Global Education: An Analysis, Commonwealth Publishers, New Delhi, India, 1994. Elwood S. Buffa & Rakesh K. Sarin. Modern Production/ Operations Management, Wiley, India, 2007. Ernst & Young, The Guide to Total Cost Management, Wiley, 2007. Garg V. P., The Cost Analysis in Higher Education, Metropolitan Books, Delhi, India, 1985. Gary Bradley & Con Mozjerin, An Introduction to ABC and Activity Based Budgeting, Operations/WCC/Oc/AAPAPresen/ G_Bradley.doc George A. Taylor, Managerial and Engineering Economy, Van Nostrand Reinhold Company, Melbourne, 1969. Hallack J., The Analysis of Education Cost and Expenditure, IIEP, UNESCO, Paris, 1960. Harvard Business Review on Measuring Corporate Performance, USA, 1998. Horngren & Foster, Data Cost-Accounting, Prentice Hill, New Delhi, India, 2000. Husen T., Planning Education in Economics, Infrastructure Allied Publishers, Bombay, 1980. J.P. Naik, The Role of Government of India in Education, Government of India. J. Vaizey & J. D. Chesswas, The Costing of Educational Plans, UNESCO, Paris, 1967. Jallade, Jean-Pierre, “Financing of higher education: The equity aspects”, Comparative Education Review, 1978. James Don Edwards, College Accounting: Principles and Procedures, Irwin Inc., Ontario, 1977. James Evans & William M., Management and Control of Quality, Thomson South-Western, India, 2004. James M. Reeve, Readings & Issues in Cost Management, SouthWestern College Publishing, 1999. John Sizer, Life-cycle Costing in the Management of Assets, Department of Industry, London, 1997. Julie Mabberley, Activity Based Costing in Financial Institutions – How to Support Value-Based Management and Manage Your Resources, Pitman Publishing, Great Britain, 1998. Kamat A. R. & Deshmukh, “Wastage in college Education”, Artha Vijanana, Vol. 2/1, 1960.

Costing for the Service Industry

55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71.

153

Kanter R. M., When Giants Learn to Dance, Simon & Schuster, New York, 1989. Kaplan R. S. & Cooper R., Cost and Effect-using Integrated Cost System to Drive Profitability and Performance, Harvard Business School Press, Boston, USA, 1998. Khatkhata D. R., “Factor of cost of education in India”, Indian Economic Journal, 1966. Knight J. B., The Costing and Financing of Educational Development in Tanzania, IIEP, UNESCO, Paris, 1966. L. W. J. Owler & J. L. Brown, Cost Accounting and Costing Methods, MacDonald & Evans Ltd., London, 1971. Lakshmi U. & Rao J. Tatikonda. “Activity-based costing for higher education institutions”, Management Accounting Quarterly, 2001. Lawton, Dr. S. Ryall, & Dr. M. Menzies, A Study on Costs, Ministry of Education & Training, 1996. Leslie G. Eldenburg & Susan K. Wolcott, Cost Management: Measuring, Monitoring and Motivating Performance, Wiley, India, 2005. Leslie Wagner, 31 The Costs of Education, The Open University Press, Great Britain, 1981. Levy, Louis et.al., Educational Expenditure in France, Japan and U.K., OECD, Paris, 1977. Lucas and Mike. “Standard costing and its role in today’s manufacturing environment”, Management Accounting, vol. 75. 1997. M.E. Thukaram Rao, Methods and Techniques of Costing, New Age International Publishers, New Delhi, 2011. M. Woodhall, Cost Analysis in Education, International Institute for Educational Planning, UNESCO, Paris. Mark Hawkes & Marge Cambre, “The cost factor: When is interactive distance technology justifiable?”, T.H.E. Journal, 28/1, Aug 2000. McKenna P., Harris A., & Smith S., A Conceptual Framework for Investment in the Discovery of Faculty Activity and Course Costs, Griffith University, 1997. Michiharu Sakurai, Integrated Cost Management, Productivity Press, Portland, 1996. Morrow M., Activity-based Management – New Approaches to Measuring Performance and Managing Costs, WoodheadFaulkner, Great Britain, 1992.

154

72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86.

Bibliography

Moussatche, Helen, Languell-Urquhart, Woodson, & Carol, “Life cycle costs in education: Operation & maintenance considered”, Facilities Design & Management, vol.19, 2000. N.G. Nair, Production & Operations Management, Tata McGraw Hill, New Delhi, India, 1996. Ness J. A. & Cucuzza T. G., “Tapping the full potential of ABC”, Harvard Business Review, August 1995. Peter R. Richardson, Cost Containment – The Ultimate Advantage, Collier MacMillan Publishers, London, 1988. Prest A.R., Financing University Education: A Study of University Fees and Loans to Students in Great Britain, Institute of Economic Affairs, London, 1966. Raj K. N., Crisis in Higher Education, Patel Memorial Lectures, Ministry of Information & Broadcasting, Government of India, New Delhi, 1971. Report of the Edwatch Study: Rhetoric vs Reality, The State of Elementary Education in India, 2008. Robert l. Katte, Management of the Total Enterprise, Prentice-Hall, New Jersey, 1970. Robin Cooper & Robert Kaplan, “Activity-based system: Measuring the costs of resource usage”, American Accounting Association, Sarasota, 1992. S. Lakshmi, Innovations in Education, Sterling Publishers Pvt. Ltd., New Delhi, India. Sandy Farran, “The cost of an education”. Macleans, Vol. 121, 2008. Shelley Umans, How to Cut the Cost of Education, McGraw-Hill, USA, 1973. Shultz, T. W., Resources for higher education: An economist’s view”, Journal of Political Economy, No. 3, May 1968. Turney P. B. B., “Common cents – The ABC performance breakthrough: How to succeed with ABC”, Cost Technology, USA, 1991. Turney, P. B. B., Activity Based Costing – The Performance Breakthrough, Kogan Page Limited, London, 1997.