The key to effective cost analysis is identifying which cost is appropriate for the desired objective. When the objective is to determine what costs, if any could be saved by a different method of providing a service, then the avoidable cost would be used for comparison purposes. The school districts should calculate the costs of a function down to the avoidable cost level, because the objective of the cost analysis is to determine if the district is performing a function at a cost competitive with the private sector. The analysis prior year expenditures and the current operating budget will be the starting point for determination of the cost to perform a function. However, operating budgets and school district accounting records are based upon expenditures.
Expenditures relate to the acquisition of goods and services.
Therefore, it is necessary to convert some expenditures to expenses when determining the total cost. Examples of this conversion might be to reverse the amount for capital expenditures from the operating budget and convert this to an amount for depreciation or to reverse a portion of supplies expenditures for one year, which will benefit the following year. The converted budget will then be adjusted as required to reflect any changes determined in the management study. Any anticipated cost increases as well as inflation will be considered in determining the total cost. Before the preparation of the in-house cost estimate, the school district should consider the following items.