1

Journal of MultiDisciplinary Evaluation

Adopting Tools from Cost

Volume 16, Issue 34, 2020

and Management
Accounting to Improve the ISSN 1556-8180
http://www.jmde.com

Manner in Which Costs in

Social Programs are
Analyzed and Evaluated
Nadini Persaud
Department of Management Studies, University of the West Indies, Cave Hill
Campus, Barbados

Background: Managing programs in an environment Intervention: N/A.

where financial resources are limited, budget cuts are
a reality, and external funding is now fiercely Research Design: A desk review was utilized for the
competitive, necessitate that both program discussion of the cost and management accounting
administrators and program evaluators have a better concepts and tools outlined in this paper. The paper
understanding of program costs, so that financial illustrates how the toolkit of economic evaluation tools
resources can be optimized for societal good. This can be enhanced by adding tools from cost and
requires serious analysis of cost behavior and a proper management accounting to enhance strategic decision-
understanding of the relationship between a program's making.
variable costs and fixed costs since these costs have
implications for clients fees and the number of clients Findings: This paper concludes by noting that program
that can be served. These types of analyses are quite sustainability must be the new name of the game. This
routine in the profitability sector, but are considerably necessitates that program administrators and program
underutilized in other sectors. evaluators start to analyze and evaluate program costs
differently. Much work is needed to move towards a
Purpose: This paper will explain how several common different philosophy of thinking with regards to
strategic management tools from cost and management program costs. Program administrators and program
accounting can be used to present more meaningful evaluators must therefore rise to the challenge and
and useful cost information, so that social program embrace cost analytical methodologies from other
decision-making and cost-inclusive evaluations can be disciplines since the use of such methodologies can be
enhanced. beneficial to all concerned.

Setting: N/A.

Keywords: break-even analysis; cost-behavior; cost structure; cost-volume-profit analysis; fixed costs; relevant
costs; variable costs.
 2 Persaud

to strengthen the manner in which cost

Introduction information is analyzed to make social
program decision-making more meaningful
Economic appraisal methods such as cost- and useful. It posits that although social
benefit analysis, net present value, and cost- programs are not in business for profitability,
effectiveness analysis, among others, offer these programs still need to at least break-
much and are frequently used by profitability even to be sustainable. Thus, a proper
companies. These companies also utilize a
understanding of program costs is essential.
number of cost and management accounting
The paper is arranged as follows: Section 1
methodologies to aid decision-making such as provides a brief literature review on the
break-even analysis, cost-volume-profit [CPV] importance of data in decision-making,
analysis, and relevant cost analysis. challenges with economic cost appraisal
Fundamental to these cost and management methods, and an overview of important
accounting methodologies is a proper concepts in cost and management accounting.
understanding of variable costs and fixed Section 2 discusses how several cost and
costs, cost drivers, cost behavior, and cost management accounting methodologies can
structure since these issues are all central to used to enhance decision-making and
the optimization of profits. In contrast to program evaluations in social programs. The
profitability companies, economic appraisal
final section provides some suggestions on
methodologies are considerably underutilized
future directions for analyzing program costs
in social program analyses and program to make more informed, meaningful, and
evaluations because of a number of practical useful program decisions.
problems which will be highlighted in the
literature review. Additionally, methodologies
from cost and management accounting are Data: The Lifeblood of Decision-
also greatly underutilized in social program Making
analyses and evaluations because of their
association with profitability. Regardless to the type of organization (public
Unlike profitability companies, where or private, profit or non-for-profit, large or
profit is the name of the game, social program small), cost data can considerably aid
administrators view social programs as decision-making in a number of different ways
fulfilling a different mission. Social programs (Lepădatu, 2012). Whether cost data are being
provide a societal good. As a result, any analyzed as a strategy to maximize profits, or
reference to profitability and its origins is to better understand your program's cost
usually considered as quite distasteful to drivers so that you deliver your program
many persons. Consequently, many beneficial services in a more efficient way, costs should
cost and management accounting be of critical concern to all decision-makers.
methodologies which can greatly illuminate As the world works towards advancing the
social program decision-making are generally United Nations 2030 sustainable development
ignored because of their link to profitability. Agenda which was adopted in 2015 by 193
While program administrators and program countries (United Nations, 2019), there is an
evaluators may not wish to think in terms of urgent call for a data revolution globally to aid
profitability, the reality is, that financial decision-making, permit better monitoring
resources are limited and those tasked with and evaluation, facilitate accountability, and
decision-making have to at least ensure that advance sustainable development (United
they spend what they have in a way that Nations, 2018). While the United Nations
maximizes societal good. They also need to Agenda is targetted at the global and national
consider program sustainability. To better levels, sustainable development cannot
comprehend program costs, several business become a reality without a partnership with all
tools from cost and management accounting people on the planet. Thus, it is incumbent
can be adopted and utilized. that those responsible for social programs
This paper contributes to the evaluation utilize data constructively to optimize the
literature by discussing how methods from value that their programs can serve in society
cost and management accounting can be used since many social programs serve a
 Journal of MultiDisciplinary Evaluation 3

fundamental societal good that directly program administrators and program

contributes to the United Nations 2030 evaluators might find it useful to utilize some
Agenda. Twenty-first century program simpler cost analytical methodologies to aid
administrators and evaluators therefore need decision-making, namely, methodologies from
to adopt a new motto, namely, cost and management accounting.

Data are the lifeblood of decision-making

and the raw material for accountability.
Overview of Important Concepts in
Without high-quality data providing the Cost and Management Accounting
right information on the right things at the
right time; designing, monitoring and
As previously mentioned, companies engaged
evaluating effective policies becomes
almost impossible (Independent Expert in the numbers game of profitabilty utilize a
Advisory Group, 2014, p. 2). wide array of cost and management
accounting methodologies that enable them to
figure out how to optimize profit. These
Challenges with Traditional Cost methodologies accumulate, measure, analyze,
Analytical Methodologies and interpret cost data for both internal and
external decision-making (Persaud, 2009b)
Traditional economic cost analytical and include methodologies such as break-
methodologies include several distinct but even analysis, CVP analysis, and relevant cost
related tools that can be used to appraise an analysis. The fundamental logic underpinning
evaluand (e.g., cost-benefit analysis, net these methodologies hinges on an
present value, cost-effectiveness analysis, understanding of cost or activity drivers, cost
internal rate of return, cost-utility analysis). behavior, and cost structure (Garrison,
Many of these methodologies require that both Noreen, & Brewer, 2016). These concepts,
costs and benefits be expressed in monetary along with some specific cost and
units, something that is not always possible management methodologies are now briefly
and/or practical (Persaud, 2018). According to discussed.
the evaluation literature, although economic
cost analytical methodologies are used by Cost or Activity Drivers: The literature provides
some program administrators and program many different definitions for cost drivers. In
evaluators, there is still very limited use of this paper, a cost driver is defined as a factor
these methodologies overall (Christie & that triggers cost (Sheng, 2009), or causes the
Fleischer, 2010). Moreover, when economic activity's overall cost to change (Estermann &
cost analytical studies are performed, they are Claeys-Kulik, 2013). It should be noted that it
often of poor quality (Madsen, Eddleston, actually quite common for a particular activity
Hansen, & Konradsen, 2017). This is due to to have more than one cost driver (Garrison et
several problems including persons not having al., 2016).
the requite skills to perform cost analysis
(Herman, Avery, Schemp, & Walsh, 2009; Cost Behavior: Refers to the sensitivity of
Linfield & Posavac, 2019; Persaud, in press), variable costs and fixed costs in relation to
controversies with certain types of monetary changes in some activity level (traditionally
valuations such as lives saved (Linfield & production volume or sales volume). Variable
Posavac, 2019; World Bank, 1996), issues costs (e.g., direct materials, direct labor) are
with subjective weighing (Kee, 2004), costs that are incurred only when the activity
incomplete and/or missing records, choice of is taking place. Thus, these costs are directly
an appropriate discount rate, problems with tied to cost drivers and vary in direct
duplication and/or double counting, figuring proportion to activity levels (Needles, Powers,
out which costs and benefits should be & Crosson, 2011; Persaud, 2009c). For
measured, measurement of intangibles example, the number of latex gloves that are
(Persaud, 2007a, 2007b, 2009a), among other used in a clinic will vary according to the
issues. Due to the limited use and challenges number of clients served. When considered on
with economic cost appraisal methods, a per unit basis, variable costs are constant;
 4 Persaud

however, when considered in total, variable approach emphasizes cost behavior by clearly
costs vary inversely with activity becoming distinguishing between an entity's variable
larger with greater activity (Datar & Rajan, costs and fixed costs (Needles, Powers, &
2018). In contrast, fixed costs (e.g., capital Crosson, 2011). Essentially, the contribution
expenditure such as furniture/equipment/ margin is computed by subtracting variable
machinery, utilities, rent, insurance) are costs costs from revenue. Fixed costs are then
that will be incurred as long as the entity subtracted from the contribution margin to
remains in operation. These costs are incurred arrive at profit (i.e., net income). The
whether activity takes place or not. Fixed costs contribution income statement approach
are assumed to have no impact on decisions in provides the basic foundation for analyses
the short-term since the organization is such as break-even analysis and CVP analysis
assumed to be operating within the relevant (Garrison et al., 2016).
range. The relevant range is the range of
normal activity, that is, the boundaries within Break-Even Analysis: Is a common business tool
which an organization can operate without which is often used during the planning and
incurring additional fixed costs in the short- implementation phases to measure the crisis
term (Datar & Rajan, 2018; Needles, Powers, point of an entity (Alnasser, Shaban, & Al-
& Crosson, 2011; Weygandt, Kimmel, & Kieso, Zubi, 2014). It tells decision-makers how
2010). On a total basis, fixed costs are much sales must be undertaken before a profit
constant within the relevant range; however, is realized, or in the case of a service
when considered on a per unit basis, fixed organization, how much revenue must be
costs vary with activity or volume becoming earned before a profit is made (Kinney,
smaller with greater activity or volume Prather-Kinsey, & Raiborn, 2006). At the
(Garrison et al., 2016). break-even point, sales/revenue equates to
the organization's variable and fixed costs (i.e.,
Cost Structure: Cost structure is concerned with its total costs) and the organization earns
the relative proportion of fixed costs and neither a profit nor a loss. A sales volume
variable costs in an organization (Garrison et below the break-even point will produce an
al., 2016; Persaud, 2009c). For example, if an operating loss, while a sales volume above the
organization has $1,000,000 in fixed costs and break-even point will generate a profit
$200,000 in variable costs, the cost structure (Garrison et al., 2016). In performing break-
of this organization will be 83%:17%. Firms even analysis, assumptions pertaining to
with higher operating leverage (i.e., a higher revenue and expenses can be changed to fully
proportion of fixed costs) will receive understand the financial success that can be
considerably more profit when sales are high generated from an existing or new program
in comparison to a similar organization with (Patton, 1999).
low operating leverage, but will be
considerably more venerable compared to the CVP Analysis: This methodology analyses the
low leverage operating organization during relationship between revenue and expenses in
periods of downturn (Garrison et al., 2016). An the short-term (Abdullahi, Sulaimon,
entity's cost structure thus has implications Mukhtar, & Musa, 2017; Bragg, 2019). It
for its performance (Ranjani, 2015). essentially examines how changes in variable
Specifically, firms with a larger proportion of costs and/or fixed costs, selling price, and
committed fixed costs (i.e., costs which cannot sales volume affect profitability (Abdullahi,
be significantly reduced in the short-term 2015; Albrecgt, Stice, Stice, & Swain, 2011;
such as rent, depreciation, salaries), are less Horngren, Datar, George, Rajan, & Ittner,
likely to break-even (Horngren, Datar, & 2008). CVP analysis is intricately related to
Rajan, 2012). break-even analysis and also uses a number
of assumptions.
The Contribution Income Statement Approach:
The contribution income statement approach Relevant Cost Analysis: Is a managerial
is geared at facilitating more informed accounting concept that focuses on identifying
planning, control, and decision-making. This business costs which are avoidable. The
 Journal of MultiDisciplinary Evaluation 5

premise underlying this type of analysis is that enhance social program decision-making and
any costs and/or benefits which will be program evaluation.
incurred regardless of the decision should be
ignored. Hence, only relevant costs and Break-Even Analysis
benefits are analyzed in formulating a
decision, thus eliminating unnecessary data
Regardless to whether your program is offering
from the analysis (Albrecht, Stice, Stice, &
services for a minimal fee sufficient only to
Swain, 2011; Garrison et al., 2016).
recover costs (i.e., to break-even), or whether
your program services are being priced to
Using Tools From Cost And make a certain amount of revenue, knowing
your break-even point in both dollars and
Management Accounting to units can provide really insightful and useful
Enhance Strategic Decision-Making information for both internal decision-making
and program evaluation. Consider the
in Social Programs and Produce following scenario. A program has fixed costs
More Meaningful Cost-Inclusive of $2,000, variable costs of $150 per unit, and
earns revenue of $200 per client. As shown in
Evaluations Figure 1, if the program serves 100 clients, it
contributes $5,000 (100 clients X $50) to cover
Program administrators and program fixed expenses. When fixed expenses are
evaluators need to make intelligent and deducted, the program will earn $3,000 in net
informed decisions that are data-driven. In income. As noted in the literature review, the
social programs, these decision focus on three Contribution Margin Income Statement
questions: (1) Which services should the provides the data needed for calculating the
program offer and/or sell? (2) Who should the break-even point. Thus, Figure 1 further
program be serving? (3) How should the shows that the break-even point is 40 clients.
program services be executed? These At this number of clients, the program will
questions can best be answered by using one neither make a profit nor a loss since its total
or more cost and management accounting costs [i.e., Fixed Costs $2,000 + Variable Costs
tools. Such tools are widely utilized in $150 X 40 clients) is exactly equal to the
manufacturing firms to facilitate decision- revenue earned [i.e., $200 X 40 clients). If the
making (Mahal & Hossain, 2015; Ranjani, program serves less than 40 clients, it will
2015). However, because these tools were make a loss. If the program serves more than
designed with a focus on profitability, they are 40 clients, the program will receive $50 in
not widely used by social program profit (i.e., the contribution margin per unit)
administrations or program evaluators. This for each additional client served.
section argues that these methodologies can
 6 Persaud

Figure 1. Break-even analysis.

 7

Figure 2. Cost behavior.

So how exactly can break-even analysis help variable), volume (number of clients served),
with social program decision-making and and revenue (client fees) that will allow the
social program evaluation? Knowing the point program to at least break-even. This requires
at which the program will break-even is very a good understanding of cost behavior (see
important because this will considerably Figure 2), as well as CVP analysis which is
decrease the risk of program failure. Today, discussed shortly. Break-even analysis can
most (if not all) social programs need to at least also be used to ascertain what the break-even
break-even to remain in operation. Thus, if a point will be if a targetted level of profit is
program is not at least recovering its costs, it desired. Finally, is can also aid decision-
may need to be discontinued. However, makers to strategically plan for program
program administrators will generally not continuation, exportation, and/or expansion.
want their programs to be terminated. They
therefore need to figure out an optimal
configuration between costs (fixed and
 8 Persaud

CVP Analysis program facilities were only being utilized at

50% capacity (current clients served = 100), a
strategy to utilize the facilities fully (i.e., serve
As previously mentioned, CVP analysis is an
200 clients instead) would actually be
important cost and management accounting
advantageous since the program's net income
tool that can be adopted for social program
would actually increase from $3,000 to $4,500
analyses and program evaluations. This tool is
which is a 50% increase in net income.
generally used in conjunction with break-even
Keeping client fees at $200 in the face of rising
analysis and uses sensitivity analyses to test
fixed and variable costs would therefore be
various assumptions to observe how net
quite advantageous if the program's facilities
income would be affected in the Contribution
could be fully optimized (see Figure 3). In this
Format Income Statement. Specifically, CVP
scenario, the program's break-even point will
analyses are helpful when program decision-
be approximately 72 clients. Alternatively, if
makers or program evaluators wish to
the program administrators were satisfied
understand how changes in either client fees
with just maintaining the original net income
and/or changes in fixed costs and/or variable
of $3,000 (see Figure 1), the program would
costs will affect the program's bottom line (i.e.,
need to serve approximately 158 clients,
net income earned). For example, if client fees
instead of 100 clients.
increase from $200 to $210 but fixed and
Undertaking CPV analysis is therefore very
variable costs remain the same, the program's
useful since it can provide data to facilitate
break-even point will decrease from 40 clients
different types of decisions including the
to approximately 34 clients [i.e., $2,000/$60 =
following:- (1) It allows sensitivity analyses to
33.33]. The program will now need to serve
be performed to examine which combination of
only 84 clients instead of 100 clients to earn
costs, volume, and prices charged would make
the original profit of $3,000 shown in Figure 1.
the best sense for current program operations.
If instead fixed costs increased from
(2) It helps to determine if fixed costs are too
$2,000 to $3,000, with no increases in either
excessive so that strategies can be
client fees or variables expenses, the break-
implemented to reduce and control these costs
even point will move to 60 clients [i.e.,
since lower fixed costs will enable the program
$3,000/$50]. Finally, if client fees increased to
to have a lower break-even. This means that
$210, variable expenses increased by $15 per
the program would start to earn net income
client, and fixed costs increased by $500, the
sooner. Alternatively, increasing the program's
new break-even point for the program will be
fixed costs could also be advantageous since
approximately 56 clients [i.e., $2,500/$45 =
this may facilitate service to a greater volume
55.56].
of clients which would offset the increase in
CVP analysis is also useful for analyzing
fixed costs. (3) It is useful for determining
how increases or decreases in client fees will
which program services to emphasize (i.e.,
affect activity levels. Thus, in the latter
what is the best program services mix). (4) It
scenario, if the number of clients served
can assist with competitive leverage when
declined from the original 100 to 90 when
funding is being sought since projections can
client fees were increased to $210, program
be done to show how the funding will be
administrators would have an opportunity to
utilized and maximized for societal good. (5) It
revisit this decision and see if it would make
is a powerful decision-making tool that can be
more sense to leave client fees at the original
used for strategic planning, as well as for
amount of $200 and instead try to serve more
forecasting for future program operations.
clients to offset the increases in fixed and
variable costs. For instance, if the existing
 Journal of MultiDisciplinary Evaluation 9

Figure 3. Cost-volume profit analysis.

Relevant Cost Analysis Relevant cost analysis focuses only on the

relevant costs and benefits of a future
decision, that is, the costs that will be incurred
Relevant cost analysis is the final cost and
specifically because of the decision and/or the
management accounting tool that will be
costs that could be avoided because of the
discussed in this paper. This type of analysis
decision (e.g., if a service is dropped or
is also suited for use in social program
outsourced), versus the benefits that would be
analysis and program evaluation and is
gained from the particular decision. All other
particularly helpful for the following types of
costs and benefits are ignored since they are
decisions: (1) Determining whether a
irrelevant to the decision. Of specific interest
particular service or procedure should be
in this type of analysis is allocated fixed costs.
added or dropped. (2) Determining if a
These are common fixed costs which are
particular service or procedure should be done
allocated to different services using some form
internally or outsourced. (3) Determining if it
of apportionment. As a result of this
would make sense to offer a one-off special
apportionment, a particular service may then
service if fixed costs are underutilized. (4)
appear as if it is losing money, when in fact it
Determining how to best optimize the use of a
is not. Relevant costs analysis is thus very
constrained resource (i.e., a resource with
important since it can help decision-makers
limited capacity). (5) Determining if a
with strategic planning and program
particular service should be sold as is or
evaluators with determining the merit/worth
processed further.
of a particular program service.
 10 Persaud

Understanding your program's cost

Future Directions for Analyzing structure is also important. Program
Program Costs to Make More administrators of short-term programs need
not worry about their program's cost
Meaningful and Informed Program structure. However, program administrators
Decisions in change of programs that are long-term in
nature need to fully understand the
The future for analyzing and evaluating costs relationship between fixed and variable costs.
in social programs must be one that merges General fixed costs in most social programs
wisdom from prior experiences with vision will include cost categories such as rent,
from exploring new approaches, methods, and insurance, capital expenditures (e.g.,
ways of doing such analyses (Yates & Persaud, equipment, machinery), utilities (e.g.,
2019). This is particularly important since electricity, telephone), and salaried labor.
funding is becoming much more competitive, Common variable costs include all expense
and also in view of the fact that all program categories that vary directly in proportion to
administrators should now be contemplating the volume of clients served. For example,
program sustainability since we must join typical variable costs in health care would
forces to achieve the United Nations 2030 include client care supplies such as gloves and
Agenda. The traditional heavy focus by both medication. Since the cost structure of many
program administrators and program social programs is heavily weighted towards a
evaluators on outcomes alone is no longer higher proportion of fixed costs, it is important
sufficient. Funders are demanding very that these costs be fully optimized, since this
detailed cost information on the costs involved can greatly reduce the cost of client fees, or in
with program operations, as well as the the case where services are provided free of
outcomes that will be derived from the charge, make program operations more
financial resources obtained. Adopting and/or efficient.
adapting tools from other disciplines such as The common CVP analysis concept that is
cost and management accounting can be so fundamental to the business discipline,
extremely useful and valuable for analyzing along with the concept of break-even analysis,
and evaluating social programs. Such can also be usefully utilized for social program
methods can assist with preparing stronger analysis. While program administrators and
program proposals to justify funding, and can program evaluators would generally not want
tremendously help decision-makers to to think of social programs in a profit driven
understand their program costs so that sense, the reality is that programs now need
financial resources can be fully optimized for to show that they can at least be run without
societal good. The use of cost and making a loss. Computing the break-even
management accounting tools can also assist point may therefore actually be good strategy
with strategic planning for program expansion since it will indicate the number of clients that
and program sustainability. can be served with the money available.
Having a good understanding of your Program evaluators are tasked with assessing
program's fixed and variable costs, how these the worth of a program and with providing an
costs behave, and your program's cost evaluation report that can help program
behavior provides powerful information for administrators to learn and improve.
strategic decision-making when different Understanding fundamental concepts from
approaches to program delivery are being cost and management accounting and how
considered. Knowing your program's fixed and they can be adopted and adapted for social
variable costs also permits quick forecasting program analysis, can tremendously help
when different program activity levels are evaluators to prepare evaluation reports that
being contemplated. For example, when fixed are more meaningful for learning.
costs and variable costs are combined into the
simple algebraic formula shown in Figure 4,
this formula can be used to determine the total
costs for any projected program activity level.
 11

Figure 4. Algebraic formula for determining total program costs.

Helping program administrators to necessitates that program administrators and

understand the cost drivers for their program evaluators start to analyze and
programs, and the concept of relevant costing evaluate program costs differently. Much work
are also important to enhance decision- is needed to move towards a different
making in service programs. While these philosophy of thinking with regards to
methods are quite routine in business program costs. As Franklin, Lomas, Walker,
decision-making, and may appear quite and Young (2019) point out a “one size fits all”
foreign and perhaps even be perceived as (p. 631) approach cannot be used to analyze
complicated by many evaluators, in reality, and/or evaluate program costs. Professional
they are actually quite simple and can provide judgment is needed to determine which cost
invaluable information on program costs. analytical methodology would provide the
This paper has highlighted that several most useful information for decision-making
tools from cost and management accounting in individual programs. Program
can be adopted and used to enhance decision- administrators and program evaluators must
making in social programs. These tools are therefore rise to the challenge and embrace
intricately linked to profitability which may be cost analytical methodologies from other
a term that is distasteful to many social disciplines since the use of such
program administrators. It may therefore be methodologies can be beneficial to all
useful to tweak these methodologies so that concerned.
the word profitability is not used. For instance,
the word profit in the contribution format
income statement can be replaced with
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