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Financial Accounting for Local and State School Systems: 2009 Edition
NCES 2009-325
June 2009

Chapter 7: Cost Accounting and Reporting for Educational Programs

The accounting structure used in governmental financial reporting is based on the expenditure classifications of fund, function, and object. These elements are the foundation for recording and reporting the financial data for school districts. Although this level of reporting can be used to compare district and state information, the data needs of school board members, administrators, school patrons, special-interest groups (including employees and parents), state policymakers, the media, and the public—the "data user groups" of the school district—extend beyond expenditure classifications to school and program reporting.


The Expanding Need for Greater Detail in Financial Reporting

Although the various school finance data user groups may focus on particular interests, they also require financial data describing the district and the schools within the district. State policymakers use school and program financial data (1) to ensure adequate and equitable funding of schools and programs; and (2) for state accountability and assessment programs that relate school-level expenditures to student achievement scores or other effectiveness criteria. Parents are often concerned with the financing of particular schools and programs. The media have a variety of interests, but frequently seek data regarding equitable funding of schools. School boards and administrators require financial data for internal management and to respond to the requests of other data users.

Although the typical financial accounting system is not intended to provide program and complete school cost data, a reporting system that identifies direct and indirect costs attributable to schools and programs can be developed to provide this additional level of information. To generate complete and accurate information to the school and program levels, cost accounting procedures must be applied to an appropriately structured accounting system.


Concepts of Program Cost Reporting by School

Statutory accounting and reporting requirements imposed on school districts beyond the fund, function, and object classifications may spring from legislative initiatives for accountability or from the need to provide differential funding for a particular set of programs. Such requirements are likely to establish the framework for school and program reporting and, therefore, might limit school districts' local cost objectives. However, local systems may be designed to identify more discrete costs, such as those related to science or mathematics programs for grades 9 through 12, even though the state reporting element is an aggregate of regular education programs in those grades.

In many districts, financial reporting for individual schools is a local budgetary management tool that focuses on the various types of expenditures that management has determined to control on a decentralized basis. These include expenditures for certain salaries (budgeted on an average cost per authorized position) as well as for substitutes, supplies, equipment, utilities, and field trips. However, site-based budgeting often excludes some of the major costs of operating a school that are not within the control of the school principal. The resulting reports meet the purposes of internal management, but are of little use in public reporting to address issues of funding requirements and comparability among schools. Therefore, a reporting system that includes full costing of all school operations is recommended, including costs that are not controllable by school administrators and the allocation of costs incurred for schools but recorded centrally. An additional step is the allocation of district administrative and school board costs. Because the provision of educational services through the operation of schools is the only product of a school district, the allocation of these costs is necessary for full costing of schools and their programs.

The functions outlined earlier in this handbook provide a detailed description of expenditures. Presenting the applicable functions for each school in a district or state provides interested parties with a wide array of uniform data. Functions such as instruction have numerous support functions, which are not always included in public reporting. This shortcoming could be reduced by including subfunctions composed of gifted and talented programs, vocational programs, adult programs, or other special programs. However, this would present problems relative to dividing teacher and other costs for classes that include students from more than one of these programs (e.g., special education students in mainstream classes, secondary and adult students in vocational education classes, and English for Speakers of Other Languages [ESOL] students in regular education classes).

Many districts take the position that reporting costs by functions is program reporting. In this context, program cost reports are taken directly from the accumulated transaction amounts without the application of cost accounting procedures. However, if the desired outcome is to report the full costing of schools and/or instructional programs, cost accounting procedures must be applied to the functional accounting. The function of instruction as defined in this handbook is not intended to include all the costs necessary to provide instructional programs. Support functions must be considered in the determination of the full cost of instructional programs. This requires identifying support function costs with the instructional programs served (1) through an observable relationship, such as the districtís director of exceptional student education and the exceptional student education program, or (2) by a rational allocation, such as fiscal services allocated to all programs on the basis of full-time-equivalent (FTE) teachers of the various programs.

In addition to the steps needed to display the full costs of instructional programs, adjustments to recorded transactions are necessary to accurately represent school costs. Such adjustments must be made for costs that are centrally incurred, but that represent costs for all schools or specified schools. Further adjustments are needed for the costs of services rendered by itinerant teachers or other shared personnel that might, for convenience, be recorded at a host school.

Program costs should be reported at the school level, with school reports aggregated into a district report. District reports can then be aggregated into a state-level report.


Analysis of Reported Costs

Full program costing requires that costs be accurately determined by a school prior to their allocation to its programs. Each school has its own base of cost allocation factors owing to its unique combination of programs offered, students attending, and teachers employed. These factors explain the variances reported in costs among schools.

Cost data should be presented with additional information that is useful in analysis, such as the numbers of students in the various programs of each school or the costs incurred relative to the revenues generated by programs or schools. Costs per student are likely to vary with the number of students in a school or its programs. Other useful factors include the seniority or academic rank of teachers and other personnel and varying facilities' operating costs. These factors increase in importance as the scale of analysis is narrowed to a few schools.


The Program Cost Reporting Structure

The program cost reporting structure is likely to be based on an adaptation of the cost objectives stated in this handbook. A typical reporting structure might be as follows:

  • regular education, elementary;
  • regular education, middle/junior;
  • regular education, high school;
  • special education;
  • alternative education;
  • vocational education, grades 6–12; and
  • adult education.

Such a program structure could be expanded to recognize higher cost programs within special education and vocational education. Costs for functions such as food services, student transportation, prekindergarten early intervention, before- and after-school programs, and fee-supported programs should be accounted for by function or special project unless there is a compelling reason to establish them as programs in the reporting structure or in the allocation of indirect costs to the programs. These costs should be presented as items in the reconciliation of the program cost report to the fund expenditures total. Separate cost reports should be prepared for the general fund and for an aggregation of the special revenue funds. Some special revenue funds, for example food service, may not be appropriate for inclusion in the aggregated special revenue fund report.

Other reconciling items to operating funds include expenditures for debt service and facilities.


Elements of Program Costs

Program cost reporting has the following two central elements:

  • identification of direct program costs; and
  • attribution of indirect costs to programs on an appropriate basis.

Program costing is not accomplished solely by the day-to-day transactions as recorded in the school district's records. In fact, such a transaction-based system would be difficult and expensive to manage because many direct cost transactions involve more than one program and the attributed indirect costs would have to be adjusted several times during the fiscal year. Effective budgetary control, an essential management tool, would become increasingly complex under such a system. A program structure that seeks to identify special education costs will be challenged to record payroll transactions for teachers when many special education students are members of regular education classes. There is a similar difficulty with teachers who teach classes composed of regular students and ESOL students. Cost reporting procedures can be applied to simplify the appropriate annual identification of teacher salaries with programs served. Indirect costs can be attributed to programs annually.

Exhibit 10 presents a sample school-level program cost report format. The columns under the heading "Direct instruction costs" provide costs by object for the function "Instruction" in each program. The "School indirect" column represents each program's allocation of support function costs recorded centrally for school services, such as centralized processing of media materials and certain custodial and maintenance costs. The "District indirect" column includes each program's allocation of support function costs that are district-level services, such as administrative technology. Note that the lower portion of the report displays a breakdown of the "School indirect" costs by function.


Use of Cost Reporting Software With Existing Data Systems

In many cases, the information needed to produce accurate school program cost reports resides in a district's existing data systems. Teacher salaries and days worked are captured in the payroll system. The ability to link teachers with programs may be found in student data systems that capture class schedules. Annual totals of other types of direct costs by school are contained in financial data files. Annual totals of support costs are captured by function for each school in financial data files. As noted earlier, some adjustments are needed to reflect each school's share of costs that are recorded in a host account for practicality.

Cost reporting software can be developed by the state education agency or school district to interface with these existing systems to expeditiously identify teachers with schools and programs. This identification allows the software to allocate the teacherís salary to schools and programs served and to compute an indirect cost attribution factor of full-time-equivalent (FTE) teacher by program. The cost reporting software can also interface with student data systems to compute FTE students by school and program for indirect cost attribution. Linking the teachersí assigned classrooms and a districtís facilities file containing the square footage of classrooms can produce a space use attribution factor for indirect costs.


Direct Costs

In a school district setting, direct costs should be synonymous with the function of instruction. The major cost of instruction is teacher compensation, which is identified to programs through the analysis of programs taught by each teacher. Other objects of instruction should be identified to a program by the financial accounting system, although in some instances—including substitute teachers who serve more than one program and paper for reproducing classroom materials—attribution factors should be used. "FTE teachers" is an appropriate basis for the attribution of substitute teachers as a direct cost to programs. "FTE students" is appropriate for the attribution of reproduction paper as a direct cost to programs.


Indirect Costs

The annual totals of the various support functions are grouped in indirect cost pools for attribution to programs by attribution factors. Attribution factors must have a valid relationship to the support service function's relative benefit to programs. For example, student support services should be attributed to programs based on the number of FTE students in each program relative to the number of FTE students in all programs. General administration and school administration functions should be attributed to programs based on the number of FTE teachers in each program relative to the number of FTE teachers in all programs. Operation and maintenance of plant services are more appropriately attributed to programs based on the relative space that they use.

The attribution factors of students, teachers, and space suggested in the preceding paragraph are not an exhaustive listing of valid factors. They can be drawn from existing databases and, therefore, are economical to generate. More important, they can be readily communicated to and understood by report users.

Indirect cost pools can be allocated under the assumption that the indirect costs benefit only the instructional programs, as indicated in the preceding paragraphs. Another school of thought is that some indirect costs also benefit other indirect costs and, therefore, that a two-step process should be employed. A further refinement of this concept would be to use a set of simultaneous equations to reduce each pool to zero by allocating back and forth among programs and indirect cost pools. However, the greater precision of these refinements might be offset by the difficulties in communicating their use.

The development of a set of attribution factors (such as students, teachers, and space) for each program in the program structure for each school constitutes the general attribution table. As the name implies, the general attribution table can accurately attribute costs that apply to all programs. Sets of expenditures that relate only to certain programs at certain schools must have separate attribution tables that include attribution factors only for those schools and programs. These special tables include only a subset of the factors included in the general attribution table. Examples of such expenditures include those funded by state or federal grants that address specified schools and programs and administrative costs focused on selected programs. The cost reporting software must be able to select the appropriate schools and programs for each special table.


Summary of the Annual Program Cost Reporting Process

There are three phases in the annual program cost reporting process.

Phase I identifies teachers with programs by using the following information from district databases: (1) persons paid as teachers, the amount of compensation for the year, and the amount of time worked; and (2) class schedules that provide the number of students in each program taught by each teacher. A report of "mismatches" of these data is used to input additional teachers for whom class schedules are not produced (physical education, art, music, etc.) or to correct data. A third source of data for this phase is the attachment of classroom space used by the teacher to data drawn from the district facilities database. The outputs of Phase I are a file of teacher salaries by table for each school and program and the general attribution table of student, teacher, and space factors for each program at each school.

Phase II is the determination of the schools and programs used to define each special attribution table by specifying the schools and programs benefited by the particular categorical programs or special grants. The report preparer must enter these as subsets of the general attribution table.

Phase III is the input of cost data other than teachers' salaries. The cost reporting software input formats include record keys for attribution table, fund, school, and control number so that district expenditure data files can be electronically accessed by a crosswalk interface. Data are input and computed by attribution table to maintain the integrity of attributed indirect costs. The public reports produced are an accumulation of fund totals for general fund and special revenue funds.

Edit reports and a correction process are provided for each phase of processing.


Analysis of Cost Reports

The data in the system allow the option of generating analyses, such as cost per student for each program at each school or cost per student for any report element. Assuming that a program cost report would include objects of direct costs, plus indirect costs at the school level and indirect costs at the district level, a wealth of data could be presented on a per student or percentage basis. The introduction of a program revenue file could allow calculations of cost as a percentage of revenue for each school and program.

Exhibit 11 provides a sample of a cost analysis report that can utilize either school level or district level data. This report provides two types of analysis: cost per student, and student/staff ratio.



The demand for data is recognizable in every facet of our information age society. Public education must compete for support as one of many public programs and, in reality, one of many purposes for which consumer dollars can be spent. Program cost reporting adds to the workload of school district accounting personnel, but advances in technology and the development of electronic databases make the provision of program cost data a manageable task for most districts.


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