Components of cost, Microeconomics

Components of Cost

In the present context of cost-benefit analysis (CBA), some new dimensions of cost like institutional cost and pupil cost need to be taken into account. Further, the significance of opportunity cost also needs to be especially brought out in this regard. In the typology of costs of education, the classification of direct/indirect cost is a general one. Thus, all types of costs fall under either of these two broad classifications. Institutional and pupil costs are two types of direct costs. The expenditure made by a school/college on buildings, play ground, swimming pool, gymnasium, etc. and expenditure on furniture, scientific and other equipments, blackboards, laboratory, library, almirahs, overhead projectors, micro film reader, film projector, slide projector, computers, sports and games materials, musical instruments, etc. are some common examples of institutional costs.

The institutional costs expended on these items can be further classified into divisible operating cost and non-divisible operating cost. An example of divisible operating cost is the salaries paid to the teachers/staff. The underlying characteristic in a component of divisible operating cost is that the total expenditure incurred can be divided by the number of pupils expressing the same in per-pupil terms. Divisible operating costs also include components like scholarships, mid day lunch, transport, etc. as they too can be accounted in per pupil terms. Institutional costs incurred on a one-time basis, lasting for a few successive academic sessions, are distinguishable from the directly divisible operating costs in the sense that they are not easily expressible in per-pupil terms (e.g. blackboards, almirahs, computers, etc.). Pupil cost, which refers to suchcosts incurred directly by the students/parents on items like fees, books, hostel, maintenance, transport etc. are yet another type of direct cost which is significant in the context of CBA. The indirect costs, on the other hand, are also of two types viz. transfer costs and opportunity costs.

Tax rebates extended as incentives to parents incurring expenditure on the education of children, on donations made to recognised institutions and purposes, etc. are illustrations of transfer costs. They are so called because the state has transferred its due share of benefits to educational purposes and thus is a form of cost to the state. Opportunity costs, as introduced earlier in unit 14, refers to a hypothetical income which could have been earned by the students by taking up some economically rewarding work in case they were not attending schools. The significance of this in the context of CBA is underscored in view of the relatively low socio-economic status of a large number of poor families in developing countries. The concept of opportunity cost (being only an imputed cost i.e. a notional or an assumed cost and not a real expenditure) is especially characterised by the difficulty to measure and account for it in the analysis of costs in cost benefit studies. The following illustration makes it easier to appreciate the intricacies of the measurement involved in this respect.

Take the case of two persons A and B who completed their school final in 1978. Person A went to the +2 stream, later completed his graduation in science and post graduation in one of the science subjects. A became a lecturer thereafter in a college in 1985. Person B pursued a course in one of the industrial trades in 1978 and completed it in 1980. He immediately took up a job in an industry and started earning. He continued to earn till 1985 when A was still in college/university. B had thus earned for sixty months by the time A had joined the employment market. Supposing B invested this sixty months earnings, it would double every seven years at 10 per cent interest per annum. The opportunity cost in this case would now depend on the life time earnings of each, duly adjusted for the cumulative income accrued to B by his investment of the money earned in the sixty months before A’s taking up any employment and the cost incurred by A for his graduate/post-graduate studies during the corresponding period.

 

Posted Date: 12/17/2012 5:10:10 AM | Location : United States







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