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Financial Accounting for Local and State School Systems, 2003 Edition

Account Classification Description
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Table of Contents
Uses of Information
Governmental  Accounting
Financial Accounting
Cost Accounting and Reporting for Educational Programs
Activity Fund Guidelines
Summary of Account Code Changes and other Appendices
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Frank Johnson
(202) 502-7362

Chapter 7: Cost Accounting and Reporting for Educational Programs

The accounting structure for 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 for comparison of 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 extend beyond expenditure classifications to the school and program reporting levels. These groups may be regarded as the "data user groups" of the school district.

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 additional financial data describing the district and the schools within the district. State policymakers may need school and program financial data for several purposes: (1) as a basis for ensuring adequate and equitable funding of schools, including funding of various 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 financing of particular schools and programs. The media have a variety of interests, but frequently seek data relative to equitable funding among schools. School boards and administrators require financial data for internal management and for responses 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 includes identifying direct and indirect costs attributable to schools and programs can be developed to provide this additional level of financial 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.

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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 state 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 secondary science or mathematics programs, even though the state reporting element is an aggregate of grades 9 through 12 regular education programs.

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 expenditures include certain salaries (budgeted on an average cost per authorized position), 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 operations for a school 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 in full costing of a school is the allocation of district administrative and school board costs. Since the provision of educational services through operation of schools is the only product of a school district, the allocation of these costs is necessary to full costing of the schools and their programs. These costs should be separately displayed as will be discussed further in this chapter.

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. A shortcoming of public reporting of this data is that Instruction is one function with numerous support functions. This shortcoming could be reduced by including subfunctions composed of programs for exceptional students, vocational programs, adult programs, or other special programs. Using these subfunctions, however, presents problems relative to dividing teacher and other costs of classes that include students from more than one of these programs. Mainstream special education requirements, secondary and adult students in vocational education classes, and ESOL (English for Speakers of Other Languages) students in regular education classes are examples of these problems.

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. If the desired outcome is 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 district's 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 teachers of the various programs.

In addition to the steps needed to display the full costs of instructional programs, school costs are not accurately represented without adjustments to recorded transactions. Such adjustments need to be made for costs that are centrally incurred but represent costs for all schools or specified schools. Further adjustments are needed for 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 an aggregation of school reports for a district report. District reports can be aggregated for a state level-report that, in reality, is an aggregation of all school reports of the state.

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Analysis of Reported Costs

Full program costing requires that costs be accurately determined by a school prior to allocation to programs of the school. Each school has its own base of cost allocation factors owing to its unique combination of programs offered, students attending, and teachers employed by the school. 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 numbers of students in a school or the programs of a school. Other factors that will also have an impact include seniority or academic rank of teachers and other personnel and varying facilities operating costs. These factors increase in importance when the scale of analysis is narrowed to a few schools.

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The Program Cost Structure

The program cost reporting structure is likely to be based on an adaptation of the cost objectives stated in this handbook. For example:

  • Regular Education, Elementary
  • Regular Education, Middle/Junior
  • Regular Education, High School
  • Special Education
  • Alternative Education
  • Vocational Education, 6-12
  • 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, community services, 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 these as programs in the 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 Special Revenue Funds as an aggregate (some Special Revenue Funds may not be appropriate for inclusion, e.g., Food Service).

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

Elements of Program Costs

Cost reporting has two central elements:

  • Identification of direct program costs
  • Attribution of indirect costs to programs on an appropriate basis
Program costing is not accomplished solely by the day-to-day transactions as recorded on the school district's records. In fact, such a transaction-based system is 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 an increasingly complex matter under such a system. Accurately recording transactions for some direct costs would pose a similar problem. 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 annually attributed to programs.

Table 11 (Program Cost Report Format) presents a sample school-level program cost report format. The columns under the heading "Direct" provide costs by object for the function "Instruction" in each program. The columns under the heading "School Indirect" represent 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 column headed "District Indirect" includes each program's allocation of support function costs that are district-level services, such as Administrative Technology. Note that the function amounts making up the total of "School Indirect" are displayed on the lower portion of the report. The report aggregating school reports provides a display of the function amounts included in the "District Indirect" column.

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Use of Existing Data Systems by Cost Reporting Software

In many cases, the information needed to produce accurate school program cost reports resides in the existing data systems of a district. 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 to school amounts are needed to reflect each school's share of school costs that are recorded in a host account for practicality.

Cost reporting software can be developed to interface with these existing systems to expeditiously identify teachers with schools and programs. This identification allows the software to allocate the teacher's salary to schools and programs served and to compute an indirect cost attribution factor of full-time equivalent teacher by program. The cost reporting software can also interface with student data systems to compute full-time equivalent students by school and program for indirect cost attribution. Linking the teacher's assigned classrooms and a district's 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 Instruction. The major cost of Instruction is teacher compensation, which is identified to program 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, attribution factors should be used. These include substitute teachers who serve more than one program and paper for reproducing classroom materials. "Full-time equivalent teachers" is an appropriate basis for the attribution of substitute teachers as a direct cost to programs. "Full-time equivalent students" is appropriate for the attribution of reproduction paper as a direct cost to programs.

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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 on the basis of the number of full-time equivalent students of each program relative to the full-time equivalent students of all programs. General Administration and School Administration functions should be attributed to each program on the basis of the number of full-time equivalent teachers of the program relative to the full-time equivalent teachers of all programs. Operation and Maintenance of Plant Services are more appropriately attributed to programs on the basis of the relative space used by the programs.

The attribution factors suggested in the preceding paragraph are clearly not an exhaustive listing of valid factors. These factors of students, teachers, and space do recognize the causal relationship of the factor and the types of service to programs. These factors can be drawn from existing databases and, therefore, are economical to generate. More important, these factors 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, a two-step process should be employed. A further refinement of this concept would use a set of simultaneous equations for reducing each pool to zero by allocating back and forth among programs and indirect cost pools. The greater precision of these refinements may 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 for only those schools and programs. These special tables would be a subset of the factors included in the general attribution table. Examples of such sets of expenditures are those funded by state or federal grants that address specified schools and programs and administrative costs that are focused on selected programs. The cost reporting software must provide for selecting the appropriate schools and programs for each such special table.

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Summary of the Annual Process

Phase I of the cost reporting process 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 space used by the teacher with 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 of the program cost-reporting process is the determination of the schools and programs 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 of the program cost reporting process 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 the table results to fund totals for the General Fund and Special Revenue Funds.

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

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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 cost as a percentage of revenue analysis for each school and program.

Table 12 provides a sample of a cost analysis report that can be produced by school and by district. This report provides three types of analysis: cost as a percentage of revenue, cost per full-time equivalent student (FTE), and FTE student to teacher (Staff) ratio.

Table 12. Cost Analysis Example

Cost Analysis
Schl-0000 School Board of __________ County
Program Number ADM Total Direct Costs Total School Costs Total Program Costs Cost Per Student in ADM Students - to- Staff
100 Regular Education
781.40 $2,277,806 $3,687,363 $4,004,190 $5,124 18.74
200 Special Education
232.58 1,282,638 1,862,601 1,989,715 8,290 10.66
300 Vocational Education
64.82 250,217 365,284 395,300 $5,834 13.39
1,078.80 $3,810,661 $5,915,248 $6,389,205    


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 all purposes for which consumer dollars can be spent. Program cost reporting adds to the workload for school district accounting personnel. 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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