Average Cost per Unit
Unit 5  Introduction  Backflush Costing  ActivityBased Costing  Calculating Unit Costs using the ABC Method 
In Unit 2, a means of calculating average costs was introduced in the context of discussing the cost structure of ODL when compared to conventional education. For ease of reference, the Average Cost Equation is reproduced here:
 AC_{s} = TC/TN_{s}
Where:
 AC_{s} = average cost per student
 TC = total costs
 TN_{s} = total number of students
The Average Cost Equation provides only a very rough measure of the cost per student, which can be misleading (as discussed in Unit 2). However, where an ODL institution offers only a few programmes with nearly uniform inputs (and, therefore, identical costs) and uniform outputs (graduates), then this approach can be used. For example, the Universidad Nacional Pedagógica in Mexico offers only a single course, a Bachelor of Education degree. Determining the unit cost per graduate can thus be calculated with some accuracy by dividing the total costs of the institution each year by the number of students who complete the course(Rumble 1997: 59). This approach is referred to as backflush costing, which is summarised in the following equation:
Backflush Costing Equation:
 C_{u} = TC/N_{u}
Where:
 C_{u} = cost per unit (FTE student, graduate, course or other unit)
 TC = total cost for institution
 N_{u} = number of units delivered or used
Exercise 5.1  Backflush Costing See if you can use the backflush costing approach to calculate unit costs by clicking on Exercise 5.1.

Unit costs can fluctuate significantly from year to year in response to relatively small changes in student numbers (subjectcourse enrolments) and in examination pass rates (‘graduates’). For example, between the 2003/04 and 2004/05 academic years, total costs for the open school in Exercise 5.1 increased by less than one percent, but the unit costs of each subjectcourse delivered grew by almost four percent because of a drop in enrolments. More importantly, the unit cost per ‘graduate’ increased by over eight percent because the examination pass rate also declined.
The backflush costing method for determining unit costs is really only meaningful where an ODL institution produces a single, uniform product. This is because it is based on the assumption that there is little or no variation in the costs of providing different courses. However, for most educational institutions it is considerably cheaper to provide arts courses compared with science subjects, which often require laboratory experiments or other facilities. Likewise, backflush costing ignores cost variations that may arise in different years of a multiannual programme or for courses at different levels (e.g. junior secondary, senior secondary, certificate or degree).