Costing models procedure

Intent

To document the methodologies and available tools (models) to facilitate robust costing of proposed activities that RMIT University may wish to pursue.

Scope

All staff

Exclusions

No particular groups are excluded. Specific tender responses, specific large projects, and any business case to be specifically approved by the RMIT Council may be excluded.

Procedure steps and actions

Procedure (including key points)

Responsibility

Timeline

1. Costing models

There are a number of self-service costing models developed and supported by Business Advisory. These standard models provide coverage to the range of teaching, commercial and research activities carried out across the University and in compliance with the Competitive neutrality policy.

These models are subject to annual review and are dynamically adjusted to reflect changes in organizational and operational structure(s).

They are:

    1. Higher Education program costing model

    2. Vocational Education program costing model

    3. Offshore program costing model

    4. Offshore research model

    5. Competitive research grant costing model

    6. Commercial project and contract research costing model

    7. Short course costing model

The core logic is underpinned by indirect cost allocation algorithms and labour arrangements.

Where the relevant proposed service delivery does not conform to the standard, a tailored model will be developed in consultation with the College/School or Portfolio group.

Deputy Director Business Advisory

All models will be refreshed annually


2. Costing models selection

The applicable model to be used for the costing task, will be determined by the nature of the activity: Teaching (Onshore or Offshore), Commercial or Research.

The following decision tree assists in determining which model is applicable to assist with the business case development. Contact the Financial Services staff (costing@rmit.edu.au) or a Business Advisory analyst if support of advice is required.

All narrative descriptions and costing models, other than the Onshore teaching costing model: Higher Education and Vocational Education program costing (which is explained in section 4), can be accessed on the Financial Services costing website (staff login required).

Due to the complexities of the Higher Education and Vocational Education program models, their release is limited to staff who have been fully trained in its usage. To support a costing engagement of this nature, a simplified data collection template is available as self-service.

Following completion of the data collection template, the staff member requiring a costing will contact their School or College Finance Manager to book an appointment, or alternatively with a Business Advisory analyst.


Costing models selection flowchart

3. Cost data structure

All models work from a series of data inputs to derive a ‘direct cost’ dollar amount. In addition, three layers of indirect costing are added to derive the overall (fully absorbed) cost of the activity:

    1. School,

    2. College, and

    3. Central Service (Service & Governance).

School indirect is based on the Functional Area data stored within SAP. College and Service allocation algorithms are based upon detailed analysis of service provisions mapped to an appropriate activity driver.

The allocation algorithm models facilitate management override where appropriate. Management is able to revisit costs allocated and adjust cost allocations for services deemed not to be absorbed. The allocation model is linear and tailored to the individual activity and circumstance.

School or College Finance Managers can assist with navigating through the models with specialised support provided by a Business Advisory analyst.


Cost data structure flowchart

4. Onshore teaching models

Each College must nominate the suite of programs that require a financial evaluation. Upon receipt of this listing, Business Advisory will maintain a master control listing.

All new programs or major change/s must go through the Program Approval Process (Academic and Business Case Approval Procedure). Please note: a major change is a change as defined by the Program Approval Guidelines.

As part of the Program Approval Process, Business Advisory will also need to factor into the analysis infrastructure and marketing costs, providing a two page summary to be inserted into the proposal. It is the responsibility of the program initiating area to co-ordinate cost estimate/‘sign-off’ statements or advice from all Infrastructure (Library, Property Services, Information Technology Services) and Marketing areas for FSG to cost.

To cost a program, the Program Costing Checklist and Teaching Template must be populated in full before contacting, or arranging a meeting if necessary, with the School or College Finance Manager, or a Business Advisory analyst.

Program developers

Deans and Heads of School

Three week turnaround is required for costing (factoring in queries and adjustments)

4.1. Student Load Projection

Load projection submitted as part of the costing exercise should take into account impact upon existing offerings and channels and lead times required to attract international students.

Business Advisory will factor into the costing the following student data variable based on information provided by the program developer:

  • Commencing intake projections each year;
  • Student attrition rates;
  • Modes of study (full time and part time);
  • Funding sources; and
  • Program structure of studies (i.e. cognate masters).

Both headcount (HC) by course and equivalent full time students (EFTSL) by fund source need to be provided.

4.2. Review and approval

The program costing assumptions, data inputs and two page summary should be reviewed and approved by the appropriate delegated authority.

4.3. Post Implementation Review

Three years after a program commences delivery, the Strategy and Governance portfolio will request an analysis of the actual results of the activity. This will be compared to the original forecast model assumptions.

The actual program performance is sourced from the annual program costing data cube.

The variance analysis is reported to the relevant College/School and to VCE via the Strategy and Governance portfolio and will assist with future costing developments.

Strategy and Governance portfolio

Deputy Director Business Advisory

5. Consulting and commercial costing

Where RMIT staff are engaged in ‘outside activities’ or providing services to external parties (i.e. ‘industry consultancy’ / RMIT commercial activity), it is appropriate that the review and approval of these activities include a process of clearly identifying all costs associated with the activity.

‘Commercial activity’ includes industry and enterprise training solutions that are highly customised for the client. These training solutions can be both accredited and non-accredited and include onshore and offshore delivery of agreed services.

The Commercial Project and Contract Research model should be used in this instance to ascertain the resources required to undertake the activity and support in arriving at a commercial outcome for industry.

Staff undertaking any commercial negotiations should be aware of the requirements contained within: The Competition Code and the Competitive neutrality policy (discussed in section 8).

VC

VPR

DVC International

DVC (E&VE)

DVC (R&I)

Deans and HoS

College Finance Manager

School Finance Manager

Deputy Director Business Advisory

6. Offshore Program Costing Model

Prior to new or renewed offshore teaching contracts being signed off, the financial viability of the program is to be established using the Offshore program costing model (XLSX). All offshore costing will be reviewed by the School and College Finance Manager or Business Advisory team member, who will provide an endorsement to the Delegated Authority as to the accuracy of the costing and the financial viability of the program.

VC

VPR

DVC International

Deans and HoS

College Finance Manager

School Finance Manager

Deputy Director Business Advisory

7. Contract Research Costing

In some instances, such as Commonwealth research grant applications (e.g. ARC grants), not all costs are included in the costing submission/funding request (e.g. capital components or profit margin). However, it is important that all costs are considered in the analysis to allow decision-making and approvals to be made to ensure transparency and all costs are clearly evident.

Specific allowable cost rules stipulated by the grant must be considered.

VPR

DVC International

DVC (E&VE)

DVC (R&I)

Dean and HoS

College Finance Manager

School Finance Manager

Deputy Director Business Advisory

8. Competitive Neutrality

Competitive neutrality policies aim to promote efficient competition between public and private businesses by ensuring government businesses do not enjoy competitive advantages simply by virtue of their public sector ownership (http://www.pc.gov.au/about/core-functions/competitive-neutrality)

As RMIT University is a government funded entity, it must follow the rules of Competitive Neutrality where appropriate (refer Competitive neutrality policy).

If costing is required for a project for an external party, it must be determined whether the service is considered to be competing with the private sector. If this is so determined then a full cost reflective pricing basis must be applied. That is, the total cost of providing the service, including both direct and indirect costs, plus the net advantage arising due to public ownership must be the basis on which the fee or rate is charged.

Calculation of the Competitive Neutrality net cost have been incorporated into the necessary models.

DVC Academic

VPR

DVC International

DVC (E&VE)

DVC (R&I)

Dean and HoS

College Finance Manager

School Finance Manager

Deputy Director Business Advisory

9. Staff costs

9.1. Staff Costs methodology

All models compute staff salaries based on the following methodology:

  • Staff salaries are extracted from the relevant employment agreement and recomputed to an “effective working rate per hour” by excluding public holidays and University holidays.
  • Specialised rates for specific projects can be loaded into the models.
  • Annual Leave and Sick Leave are then factored into the effective hours based on taking into account the average number of days utilised in the University in the previous year.
  • This method omits Maternity Leave Loading and expenditure as this is incorporated as an indirect cost.
  • The On Costs factored into the models include Annual Leave Loading, Long Service Leave Loading, Superannuation, payroll tax and workcover and varies by sector (HE/VE) and employment conditions (i.e. fixed, casual etc).

In the absence of a specified incremental annual increase percentage under a bargaining agreement, a percentage estimate is applied.

Deputy Director Business Advisory

Annually or as required

9.2. Special Rates

In addition to the calculation in 9.1, the Onshore Teaching models (HE and VE) also factor in the teaching hours per classification, based on an informal survey and work plan analysis, and teaching restrictions governed by the relevant employment agreement to arrive at an ‘effective teaching rate’.

10. Multi year costing

Where applicable, the models are built to factor in multiple year projections.

Some models will cost the activities based on a fixed direct cost and fixed overhead cost which is then applied to future periods without indexation. This is apparent in the Onshore Teaching models as the analysis focuses predominantly on the complexities of student volume projections such as multiple year intakes, student attrition, different study modes (full time and part time) and program structure of studies (i.e. multi exit pathways availability some programs).

Some models, particularly the Offshore costing model, may have an incremental year on year increase of salaries applied to future periods of costing to assist with projecting potential offshore taxation expenses.

In summary:

  • viability approvals will be costed in constant dollars; while
  • analysis to support pricing negotiations will be costed in future dollars.

HoS

Deputy Director Business Advisory

11. Treatment of ‘direct indirect costs’

It is important to note that some activities may have ‘direct indirect costs’. Costs that are incurred by a School, College or Service area specifically for the activity. For instance a new program may require specialised text books to be purchased for the Library.

It is important to understand that a Service area will service not just the one School or activity, but the entire University. The additional cost incurred by the Service area for a particular activity will be treated as a ‘direct cost’. The rationale is that the Service area will have to incur the additional expenditure as a direct result of the activity; and the aim of the costing is to cost the activity in its entirety.

HoS

Deputy Director Business Advisory

12. Program/course development investment cost

The investment cost of a course/program is assessed and treated as an ‘activity’. Hence, there will be three layers of costing added to the direct cost.

The recovery of the development investment will depend on the nature of the program/activity.

Generally programs offered in multiple locations will have the investment costs spread over the different streams in the different locations based upon the following:

  • concurrent programs will have the costs amortised over the multiple programs; and
  • contingent (standalone) programs will need to recover the entire investment cost.

HoS

Deputy Director Business Advisory


13. Different types of costing methodology that may apply

Incremental costing versus full absorption costing

Absorption costing refers to all costs associated with the activity being absorbed by the relevant activity. The cost of delivering a short course will include direct materials, direct labour, and both variable and fixed School, College and Service overheads. As a result, absorption costing is also referred to as full costing or the full absorption method.

Incremental cost is the cost associated with increasing the activity by one unit. As some of the activity costs are fixed and other variable, the incremental cost will not be the same as the overall average cost per unit.

If the activity is to be delivered over multiple years, then it will be costed under the absorption method.

The incremental method will be utilised if the delivery commences and concludes in a single budget period.

14. Costing School overheads

Business Advisory will determine whether to cost the School overheads using the incremental costing or the full absorption method.

The following flow chart documents the concepts:

Indirect School overhead costs flowchart

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