Costing

JCPSG Standard Definitions for Costing and Pricing

General Terms used by Universities and Colleges - Accompanied by Standard Definitions from the Chartered Institute of Management Accountants (CIMA)

CIMA Standard Definition	HE Context
Activity Based Costing (ABC)
An approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities and activities to cost objects (e.g. product lines) based on consumption estimates. The latter utilise cost drivers to attach activity costs to outputs.	The core principles of ABC have been incorporated into all of the JCPSG's guidance, including 'Management Information for Decision Making: Costing Guidelines for Higher Education Institutions' - July 1997 and Transparent Approach to Costing (TRAC) Guidance - July 2005.
Activity Cost Pool
A grouping of all cost elements associated with an activity.	The Transparent Approach to Costing (TRAC) Guidance refers to cost pools as follows: Costs in any one cost pool are attributed using the same cost driver. A cost pool may relate to an activity, or a Support cost: activity cost pools represent the costs of activities. There are three main activity cost pools - one for each of Teaching, Research, and Other. Additional cost pools are needed for sub-activities (PFT, NPF T; each research sponsor type; O and O(CS)); Support cost pools are intermediate holding places. The costs of a finance department may be separated into a number of cost pools - relating to payroll, fees, and all other areas. A different cost driver is used for each cost pool (staff time/numbers, student FTEs, all other costs) when attributing its costs to an activity cost pool. All cost pools need to hold information by academic department; and need to differentiate between Support costs and direct costs of the main activities of Teaching, Research, and Other (to allow the calculation of the indirect cost rates). See also TRAC Guidance.
Allocate
To assign a whole item of cost, or of revenue, to a single cost unit, centre, account or time period.	In TRAC, costs may be related to specific programmes or projects but cannot easily be identified with on particular programme or project. Most Directly Allocated costs are within the Support cost total under TRAC. The exception is academic staff time spent on T, R and O which under annual TRAC is a direct cost and not a Support cost.
Apportion
To spread revenues or costs over two or more cost units, centres, accounts or periods.	Some HEI costs cannot be directly allocated to one single activity, institutions then need to apportion these costs to activities via cost drivers (see below for definition). Apportioned costs are shared costs that are grouped into cost pools and attributed to activities on the basis of a proxy - a cost driver. These costs make up the significant part of the Support costs in the annual TRAC process. Indirect cost rates and charge-out rates (see Part IV of the Guidance) are the techniques used to charge research projects (and programmes) with the various types of Support cost. See also TRAC Guidance.
Breakeven Point
The level of activity at which there is neither profit nor loss. It can be ascertained by using a breakeven chart or by calculation.	Institutions are most likely to undertake breakeven analysis (in order to calculate the breakeven point) when they make decisions on the viability of services with numerous customers, e.g. courses, conferences, residential lettings or publications.
Contract Cost
Aggregated costs of a single contract; usually applies to major long-term contracts rather than short-term jobs.	HEIs make extensive use of contract costing in order to calculate the costs of teaching, research or consultancy projects. In the past some of these contract cost calculations have been based on either the marginal cost or the costs the sponsor will fund, rather than the true full cost to the institution. The information derived from the implementation of the Transparent Approach to Costing (TRAC) methodology will mean that institutions will be able to calculate the full economic cost (see definition in section below) of a contract.
Contribution
Sales value less variable cost of sales. It may be expressed as total contribution, contribution per unit or as a percentage of sales.	In a HE context, the level of contribution achieved by a contract relates to the degree to which the price provides support towards the fixed costs (primarily permanent staff, premises and equipment infrastructure and other indirect costs) of the institution.
Cost Centre
A production or service location, function, activity or item of equipment for which costs are accumulated.	Most HEIs have divided their institutions into cost centres for financial management purposes, these could be either academic departments/schools or support cost centres, such as Finance Office or the Library. Many institutions operate a Resource Allocation Model (RAM) that uses academic cost centres as the level at which devolved financial management operates and at which income and costs are accumulated.
Cost Driver
Any factor which causes a change in the cost of an activity. An activity may have multiple cost drivers associated with it.	Cost drivers are used at various stages of the cost attribution process. Cost drivers are used for those costs that cannot be directly allocated. Costs attributed to Support cost pools use cost drivers to attribute their costs to activity cost pools. For example, estates costs would be assigned to an estates cost pool and would be attributed to academic departments and activities on the basis of space used. Cost drivers used for attribution to departments are not generally the same as those used for attribution to activities. A wide range of cost drivers could be used. Some are used by some institutions in their existing resource allocation models (RAMs). However, RAMs have historically had a different focus and it is unlikely that all cost drivers currently used in RAMs are relevant: TRAC requires an attribution to activities (few RAMs have required this); the data used in the RAM may not be up-to-date and may be drawing on planned rather than historical data; there should be no 'motivational' element in the cost drivers for TRAC - this can be important part of a RAM; the cost drivers in the RAM are often many and detailed and their use within the extra dimensions of TRAC (activities, PF and NPF, research sponsor type) may prove very complex. Sensitivity analysis can be carried out to inform management of the impact on different cost drivers on key cost pools. TRAC does not require a large number of cost drivers. Institutions have considerable discretion to choose which cost drivers to use and at what level of detail. Some areas to be considered are: the costs that are already directly charged to departments in institutions' management accounts (for example, equipment costs, space costs, in some institutions); the availability of information held for other purposes (for example, information on the use of library and learning resources may be recorded for use in resource allocation and strategic planning in some institutions); the cost of collecting the information (for example, comprehensive information of the use of IT facilities may be costly to collect). Some common cost drivers that might be suitable to use are: headcount and/or academic/research FTEs - sometimes including clerical, administrative and technical staff; headcount and/or student FTEs, distinguishing between PGR, under-graduate and post-graduate taught students; square metres of usable space occupied by departments; total Research costs; total non-pay costs; academic or total staff time. Academic staff time should only be used as a cost driver if there is no other better alternative. When used, it should include the time directly attributed (by Research Assistants) as well as that attributed on time allocation schedules (by academic staff). Income is unlikely to be a robust cost driver as it is not a good indication of the use of resources by departments or activities. In some cases a combination of cost drivers may be appropriate e.g. the use of both staff and student numbers to attribute some types of library costs. More detail on the use of Cost Drivers in TRAC is shown here
Direct Cost
Expenditure which can be economically identified with and specifically measured in respect to a relevant cost object.	Under annual TRAC, all costs are either directly charged to an activity and classified as part of the direct costs of that activity, or are classified as a Support cost. Under TRAC fEC, all costs are then further classified as a directly incurred cost, a directly allocated cost, or as an indirect (apportioned) cost: Research costs classified as a direct cost under annual TRAC are generally classified under TRAC fEC as a directly incurred cost. The main exceptions to this are academic staff costs (which are classified as a directly allocated cost); costs identified as a Support cost under annual TRAC can be classified under TRAC fEC as either a directly allocated cost (e.g. estates, laboratory technicians, major facilities) or as an indirect cost. Directly incurred costs (DI) specifically relate to one programme or project. They would not be incurred if that programme or project did not take place. This term is very specifically used when costing research projects under TRAC fEC. See in particular Part V Section C of the Guidance for a further discussion of DI and DA for academic and research staff costs; and Part V Section D of the Guidance for other costs. Directly incurred costs include Research Assistants, technical staff (dedicated to a project), consumables, equipment (purchased on that project), etc. Sponsors of projects funded on a fEC-basis will generally allow spend on DI costs to be vired (budgets transferred between cost headings within the DI cost total). Actual costs are recorded on the project cost records. These costs should be supported by a full audit trail - e.g. timesheets for staff (unless they are wholly chargeable to one project); records of receipted payments etc. Under the annual TRAC process, these costs are obviously categorised as T, R or O. R costs would include costs directly incurred on a research project; T costs would include costs incurred on a programme such as field trips, or placement costs. Directly allocated costs (DA) are related to specific programmes or projects, but cannot be easily identified with one particular programme or project. They are shared costs. Again, this term is used very specifically when costing research projects under TRAC fEC. (See in particular Part V Section C of the Guidance for a further discussion of DI and DA for academic and research staff costs; and Part V Section D of the Guidance for other costs.) Directly allocated costs are not charged to research projects and programmes on the basis of actual expenditure, but on a standard charge-out rate. This can be a proxy - such as academic/research staff FTEs. Examples of directly allocated costs on research projects include investigator time/costs, technicians (other than DI technicians), major research facilities, animal houses, estates. Sponsors of projects priced on a fEC basis will generally not allow virement of budgets within DA cost headings, or between DA and indirect cost totals. Most DA costs are within the Support cost total under annual TRAC. The exception is academic staff time spent on T, R, and O which under annual TRAC is a direct cost, not a Support cost. See also TRAC Guidance.
Indirect Cost
Expenditure on labour, materials or services which cannot be economically identified with a specific saleable cost unit.	Indirect costs are not directly related to any one project or activity. However, they are a necessary part of the costs of undertaking an activity. Their costs therefore need to be attributed to projects in order to calculate a fEC. This is done through a proxy - staff and student FTEs. An indirect cost rate for Research is calculated by taking the total indirect costs for Research, and dividing it by Research FTEs. The resulting rate is quoted as a £ per FTE. This is then applied to the number of FTEs on each project, to provide the indirect cost charge for that project. See also TRAC Guidance.
Marginal Cost
The part of the cost of one unit of product or service which would be avoided if that unit were not produced, or which would increase if one extra unit were produced.	Institutions are required under TRAC and fEC principles to recover full economic cost or a proportion thereof and due regard must be taken of the breakdown of costs between Directly Incurred, Directly Allocated and Indirect Costs. HEIs should not apply the normal principles of calculating marginal cost.
Timesheet
A record of how a person's time has been spent. Used to calculate pay, to assess the efficient use of time or to charge for work done.	Employees of companies and public corporations often complete weekly or monthly timesheets either for management purposes or in order to charge out their time to clients.
	Within the Higher Education Sector, many academic staff have experience of completing project timesheets as part of the audit trail of sponsors (e.g. the European Commission). The Transparent Approach to Costing: Guidance Manual does not require academic staff to complete timesheets, as robust time data can be collected using time allocation schedules (see definition in section below).
Transfer Price
The price at which goods or services are transferred from one process or department to another.	Many HEIs utilise transfer pricing for the charging out of central facilities (e.g. reprographics, catering and building services) to academic departments and other support services.
Uniform Costing
The use by several undertakings of the same costing systems, i.e. the same basic costing methods, principles and techniques.	The Transparent Approach to Costing: Guidance Manual, being implemented in all UK Universities and Colleges, represents a uniform approach to the costing of all HE activities.

Specific Terms used by Universities and Colleges
JCPSG DEFINITION
Auditability
The Transparent Approach to Costing: Guidance Manual, being implemented in all UK Universities and Colleges, represents a uniform approach to the costing of all HE activities. ‘Institutions should be able to demonstrate the validity of their cost calculations by appropriate audit trails between summary reporting and base data. Audit to meet Transparency Review requirements is to be carried out as part of the institution's normal audit process and will probably be included as part of the rolling internal audit programme. Auditability means that the reported figures should be reconciled to the institution's externally audited annual financial statements; traceable; supported (verified) by surveys; and supported by managers' statements that they fairly reflect cost attribution.’
Cost Adjustments
The TRAC methodology requires the calculation of two cost adjustments: infrastructure and cost of capital employed.
Cost–Based Pricing
A pricing methodology that uses the cost of a product or service to determine its price. It is a means of calculating the ‘should-be-price’for publicly-funded contracts. In these cases the price is equal to the full economic cost (see definition below) of the product or service.
Department
An institutionally defined management unit, this may be an individual academic department or a faculty or school.
Department Type
The TRAC methodology utilises three department types: classroom, laboratory and clinical. The grouping of departments into department types is defined by each institution.
Full Economic Cost (FEC)
The fEC of a project consists of: directly incurred costs research staff technical and clerical staff costs non-staff costs (consumables, equipment purchase, etc.) directly allocated costs principal and co-investigators' time and costs estates costs (including the infrastructure adjustment) charges for laboratory technicians and major research facilities indirect costs (including the cost of capital employed) The fEC of a project is not dependent upon what the sponsor will pay, which is the price. The difference between the fEC and the price is the institutional contribution, or the institutional surplus available for re-investment. fEC is used to inform prices - either directly (fEC-based prices) or indirectly (market-besed prices).
Indirect Cost Rates
Indirect costs are not directly related to any one project or activity. However, they are a necessary part of the costs of undertaking an activity. Their costs therefore need to be attributed to projects in order to calculate a fEC. This is done through a proxy - staff and student FTEs. An indirect cost rate for Research is calculated by taking the total indirect costs for Research, and dividing it by Research FTEs. The resulting rate is quoted as a £ per FTE. This is then applied to the number of FTEs on each project, to provide the indirect cost charge for that project. This method of calculating an indirect cost rate acknowledges that the number of people - academics, research staff and students - is one of the key drivers of indirect costs. Methods other than a £/FTE should not be used (for example, a percentage of direct staff salaries). This section focuses on the indirect cost rate for Research. Full robustness in the data and calculations should be achieved by the beginning of August 2007 (2006/07 data, applied to research projects from February 2008). In particular this requires FTE numbers to be calculated robustly. The indirect cost rate should be historically based. For example, data from the 2004/05 year (included in the annual TRAC report submitted at 31 January 2006) is used to produce the rates applied from 1 February 2006 to 31 January 2007. Rates should be calculated once a year, and apply from the 1 February of a year for the following 12 months. Institutions that are unable to calculate updated rates on 1 February of a year can continue to use their previous year's rates (but without further indexing). When their new rates are available these would be applied to research projects until the following 31 January. The fEC-based price calculated on projects already being reviewed by sponsors will not, however, be changed. Therefore, it is not a TRAC requirement to re-cost these projects with the latest rates, although this is good practice. If new rates are not available by 31 July of Year 2 (i.e. 18 months after 1 February of Year 1 when they first were applied) then the non-compliant rates apply, until the rates are recalculated.
Knock-for-Knock Arrangements
Describes the nature of the partnership between an HEI and a NHS Trust. It refers to the uncosted mutual assistance from sharing arrangements with medical and dental schools.
Market-Based Pricing
A pricing methodology that uses the demand for a product or service to determine its price. The price reflects the perceived value derived by the customer and is independent of the costs of providing the product or service.
Materiality
The effort applied to costing should be proportionate to the significance of the costs being measured. The general principle to be followed is that undue effort or precision should not be put into very small costs: and equally, that proper account should be taken of significant costs. For most institutions, the most important cost elements are: academic staff academic services (library, computing etc) infrastructure costs (chiefly estates). The Guidance advises on methods on all of these. Institutions must, however, consider what is most important for them. The way to test this is for institutions to consider whether their proposed treatment of a particular cost could make a significant difference to the results for the particular purposes for which they are costing. As a starting point, a difference of 10% or more is worth further consideration. Formally, an item is material if its omission, or misattribution, in the costs of an activity could be expected to lead to a distortion of the view given by the reported activity costs by a user, such that their judgement would be likely to be influenced if that item were more accurately stated: i.e. would its inclusion or exclusion distort figures? A second order question is - would it be likely to change decisions as the data is progressively used for internal management purposes? The levels at which materiality can be considered when attributing costs for the annual TRAC exercise are: three discipline-level costs (clinical, laboratory-based and classroom-based); Teaching (T), Research (R), Other (O) and Support (S); PF and N PF; within PFR, the total of Research Council and institution-/own-funded Research. The following can be considered: all reported costs should be fairly and reasonably stated. If a change in assumptions or methods could mean a material change to these figures, then that should be considered carefully to ensure that the information finally produced is 'fair and reasonable'; materiality could be indicated by a broad rule of thumb. If, by altering a cost driver or method in the annual TRAC model, costs in one of the above areas could vary by +/- 10%, then this should be carefully scrutinised to ensure that the most appropriate technique is used. This does not mean that institutions can calculate costs to +/- 10% of T, R, O or S; the total costs of the activity affected would also inform materiality; at a lower-level of costs (e.g. by department) +/- 10% would still provide a useful guide for judging the importance of the many decisions and judgements required - but applied at the level of the cost under consideration at the time; attention should thus be focussed onto the significant costs. Institutions should beware of calculating undue precision over small cost elements, or seeking 'spurious accuracy'; institutions are not required repeatedly to measure factors that do not change; materiality is different from statistical precision, which is discussed in the context of verifying time allocation methods and data in the annual TRAC process. See also TRAC Guidance.
Non-Public Sponsors
Are those organisations that support non-publicly-funded (NPF) contracts, i.e. UK based charities, UK industry, commerce and public corporations, EU government bodies (excluding the EC) and all other overseas bodies.
Public Sponsors
Are those bodies that support publicly-funded (PF) contracts, i.e. UK central government/local authorities, health and hospital authorities, funding councils, research councils and the European Commission (EU).
Strategic Pricing Policy
The JCPSG strongly advises all HEIs to develop and regularly review their strategic pricing policy. The Pricing Toolkit for the Higher Education Sector, published by the JCPSG in October 2000, offers institutions the following advice: ‘Strategic pricing policy means having a longer term view of the pricing of services and products being delivered by the HEI. It should come out of the HEI's corporate strategy and should aim to enable achievement of the HEI's overall strategy. Strategic pricing policy should lay down guidelines for pricing against which individual pricing decisions should be assessed.’
Support Costs
Support costs are costs that are shared, and cannot be directly attributed to activities. Support activities and costs are those that do not relate specifically to one project or programme but are shared between many projects, programmes or activities. This term is particularly important in the annual TRAC attribution process. Support costs include pay and non-pay costs, estates, learning resources, administrative departments, academic services, staff and student services, the infrastructure cost adjustment and the cost of capital employed. Support costs are made up of indirect costs and the estates costs of academic departments. Indirect costs consist of: academic Support time not spent on Teaching, Research or Other clerical and technical staff supporting Teaching, Research or Other (except where these costs have been directly incurred on a research project or programme) non-staff costs in academic departments staff and non-staff costs in central service departments estates costs and the part of the infrastructure adjustment that relate to central service departments gross cost of capital employed (i.e. restructuring and interest costs and the net COCE). Estates costs of academic departments consist of: estates costs and the part of the infrastructure adjustment that relate to academic departments; including laboratory technicians and the costs of equipment and major research facilities. Estates costs are defined in Part IV (Charge-out rates) Section E (estates). Support costs do not include: institution-/own-funded Research - which is a direct Research cost residences - which are Other the costs of scholarships and bursaries - which are a direct Teaching or Research cost. Support should include an attribution of costs from O (CS) if some of the services provided from NHS Trusts to institutions under knock-for-knock are Support activities (e.g. the provision of infrastructure). Under annual TRAC Support costs are all attributed to the three main activities, forming part of the total cost of T, R and O. The balance in Support should be zero.
Time Allocation Schedule
The TRAC methodology relies heavily on the utilisation of time allocation schedules. The Guidance Manual: Transparent Approach to Costing, published by the JCPSG in July 2000, defines the term, thus: ‘The phrase time allocation schedule refers to any form that is used to collect data on the time that an individual spends on activities. This could be daily, weekly, monthly or annually; in hours or percentages; completed by individuals or their head of department.’
Transparent Approach to Costing (TRAC)
A uniform approach to the costing of activities undertaken by all UK HEIs. The TRAC methodology was established to meet the requirements of the Transparency and Accountability Review of Higher Education. The TRAC methodology is described in the Guidance Manual: Transparent Approach to Costing published by the JCPSG in July 2000 and later updates. A consolidated manual encompassing TRAC Guidance Manual Volumes I - III and the 4 TRAC Updates was published in June 2005.