DEVELOPING COST and BENEFIT ESTIMATES


This is the age of accountability. Each day we see more and more demands by the public and their elected representatives to quantify the results of their investments in Cooperative Extension. It is no longer sufficient to quote numbers of participants in programs or educational materials produced. We must be in a position to document specific outcomes and compare them to financial investments in the program. Cost-benefit analysis is a technique for comparing program outcomes to inputs.


Cost-Benefit

A memorandum provided by the Federal government for heads of executive departments and establishments (White House, 1994) defines cost-benefit analysis as"...A systematic quantitative method of assessing the desirability of government projects or policies when it is important to take a long view of future effects and a broad view of possible side-effects." Review of the literature indicates that cost-benefit analyses are described in an economic context, and generally supported by economic theory and practice. Since application of pure economic principles is not the goal of the practicing Extension educator, a practical and realistic understanding of the factors associated with program cost and the valuation of program outcomes can be useful in obtaining valuable information for organizational accountability and support purposes.


Cost

Cost can be determined by placing economic values on the amount of resources required to plan, implement, and complete a program. These costs include those for all personnel who plan and implement the program and the associated direct costs such as travel, publications, supplies, publicity, equipment, and facilities charges. Program costs which are not directly borne by the Extension Service should not be included in the cost analysis. These items not included are such things as volunteer time and participant costs.


Benefits

Benefits are those positive outcomes that can be reasonably identified as the positive change resulting from an Extension program. Economic values can be assigned easily to some outcomes. Other outcomes may be more difficult to value. When determining value, factors such as use value, esteem value, market value, and exchange value may be useful in making a determination. A description of these valuing systems follows:

Use Value- This analysis reflects the actual monetary value placed on a product or service based on its actual use, such as gasoline, brick, fertilizer, concrete, bread, tomato, or similar basic items of our economic system.

Esteem Value- This value reflects ego or esteem values associated with a product in addition to its actual use value. Basic clothing as compared to designer clothes that serve the same basic function is an example of esteem value. Prestige brands of products that are psychologically pleasing usually include esteem value as well as actual use value.

Market Value- While use and esteem value reflect the social and physical properties of products and services and influence purchase decisions, the actual supply and demand, product attributes, cultural patterns, and consumer choice reflect market values. Thus, if a product is viewed as highly useful and beneficial to nearly everyone, yet is extremely plentiful, its market value will be low. However, if this same product became scarce, its value would likely increase significantly.

Exchange Value- This value reflects the actual amount of money one exchanges for a product or service.

These valuing systems may be combined or stand alone as one seeks to estimate monetary benefits of program outcomes. Realistic assessments based on what many people may be willing to pay can be a good guide for estimating these monetary values. Reality in valuing any product or service will add credibility to program benefit assessments.

In assessing values of program benefits, a determination must be made of what products to value. Values that are directly related to the program objectives will generally be easier to make and more acceptable for accountability purposes than attempting to extend benefits to secondary audiences or situations. In making these assessments, actual documented change in practices can be observed or identified by client or other knowledgeable source feedback or testimony. Some information may be obtained from a representative sample population and extrapolated to a larger population, or analysis of available data can often provide concrete information that can be easily valued. While some program outcomes may indeed be rather easily valued, other benefits may be more difficult to measure and to apply direct values. In these cases, factors such as shadow pricing, opportunity costs, spillover, or external valuing may provide the best support for reaching benefit decisions. Each of these indirect valuing factors will be discussed briefly.

Shadow Pricing- This system is used when placing a value on program outcomes other than market price. Program outcomes that cannot be bought or sold, such as social value, can be ascribed a monetary value. Some effort may be required to construct good shadow prices, but frequently some items may have been sufficiently studied to provide accurate information that can be used in program valuing by shadow pricing. For example, the current cost of incarceration is about $100 per person per day. When 4-H leadership programs significantly reduce crime rates for participants as compared to nonparticipants, this shadow price can be used as a means of determining estimated savings to society. Information is also available regarding income differences between college graduates and high school graduates. If a 4-H leadership program directly influences participants who otherwise would not have done so to continue their formal education beyond high school, shadow pricing can be used to effectively predict a value for this program result. Reasonable and realistic application of shadow pricing is necessary in order to avoid overly optimistic or highly inflated estimates of program benefits.

Opportunity Costs- This means of estimating value focuses on establishing a value on alternative opportunities or resources that were used or lost by applying them in one way rather than another way. For example, if one spent an entire day getting a car repaired, the time spent for this imposition could be valued in terms of what the individual could have otherwise done with the time. Perhaps this essentially wasted time used for this task of taking the car to the garage, sitting and waiting, and returning home could have been used by a salesperson for making several calls. The missed sales opportunities can be calculated as opportunity costs. From an Extension program perspective, a farm management program that educates a farmer as to benefits of leasing equipment versus purchasing may result in the farmer using the available annual savings for other more productive gains. These values can be calculated based on identifiable and realistic alternative benefits that can accrue as a result of these savings.

Spillover- This means of value analysis can help determine values resulting from circumstances or situations that are directly influenced by other situations or circumstances. Perhaps one of the most easily understood examples of spillover effects is the reduction in residential real estate values near airports that expand and increase air traffic. The increased noise levels make for less pleasant living conditions in the nearby areas, and thereby, values of homes in those areas decline. From a program valuing perspective, when community development programs have helped to create 10 new jobs, the direct effect is the increased income to those individuals. The spillover effect is the increased level of consumption which has a direct impact on the local economy, such as restaurants, building supplies, theaters, etc. These economic benefits are often estimated to range from an additional value of $3 to $6 for each dollar increase in income resulting from the new jobs. Spillover costs can also result, such as the increased costs to taxpayers for building new roads to the location or providing increased services for the individuals involved, such as greater waste handling costs. Therefore, in calculating the ultimate spillover benefits, both increased value as well as costs should be reconciled. Information of this type can be easily obtained from economic development officials as well as local and state government officials.

Establishing Program Measures

A practical guide for determining program costs and benefits will need to be established. A cost worksheet for specifying and entering costs can be especially useful. The identifiable program benefits can also be calculated using a worksheet to list the benefits, price units, and values to be used. By developing these specific measures of costs and benefits, consistent estimates can be made that can be justified based on the planned process used for establishing and calculating program costs and benefits.

Summary

The process of making program cost and benefit estimates can be complicated, frustrating, and time consuming without a defined plan for making such estimates. Even with a plan, one can make this process overly taxing if it is not kept to a basic level of assessment. Extensive cost-benefit assessments are often made by economists, program analysts, or others who possess the knowledge and skills required for designing and conducting in-depth program analyses. There is no desire by Extension to ask its staff to make such extensive, in-depth cost-benefit analyses. However, for the purpose of providing decision makers and others reasonable estimates of actual program benefits obtained for the funding provided, it is necessary to establish a realistic and simple plan for obtaining information needed for making estimates of program costs and benefits.

Sample Cost Benefit Analysis:

One of the program objectives for the Adams County Extension staff is to reduce production costs for corn by teaching farmers to use soil tests as a means of developing correct fertilizer application rates. The planned activities to carry out this program include three county meetings, development of a county publication, collection of soil samples for a demonstration farm, 25 farm visits to provide individual instruction, a field day, collection of data from participating farmers, and a report of actual results. The cost-benefit analysis might look like this:




Cost Items
250 Hours of Agent Time @ $15.60/hour
$3900.00
400 Hours of secretarial time @ $10.00/hour
$4000.00
Printing and mailing publications
$400.00
Travel Expenses
$400.00
Field day advertisements and signs
$350.00
Telephone cost for data collection
$150.00
Meeting room charges
$50.00
Use of office equipment and office operations costs
$800.00


Total Cost of Program
$10,500.00



Direct Benefits Measured

25 farmers reduced fertilizer use by 100 lbs. per acre of actual nutrients applied on 3,500 acres of corn with no change in yield. Applied cost per lb averages $.15.

3500 x 100 x .15 = $52,500 direct benefits
Indirect Benefits valued

The state environmental agency estimates that each lb. of nitrogen added to a stream causes $3 in environmental damage. If one-third of the actual nutrients applied is nitrogen and an estimated 10% of the unneeded nitrogen would have been carried away by surface runoff, we can calculate a secondary benefit for our program:
3,500 x 100 x .33 x .1 x $3 = $34,650 in secondary benefits

Discussion

With the above calculations, we are now in a position to state that our successful program in soil testing returned a direct benefit to farmers of $5 for every $1 ($52,500 - $10,500) which was invested in the program. In addition, society as a whole received more than $3 in environmental benefits for every $1 invested in the program.

SD-8

COST ESTIMATES WORKSHEET


Components
Units
No. of Units
Unit Value
Total Cost
Agent time
Hours



Program asst. time
Hours



Paraprof. time
Hours



Specialist time
Hours



Materials
Pieces



Postage
Pieces



Equipment
Pieces



Facilities
Time



Travel
Miles



Rent
Hours



Utilities
Hours



Others (Identify)







Subtotal
________
Total Program Cost










References

Fallon, Carlos (1980). Value Analysis. Triangle Press, Carrboro, NC.
Levin, Henry M. (1983). Cost-Effectiveness: A Primer. Sage Publications, Beverly Hills, California.
Mishan, E. J. (1979). Cost-Benefit Analysis. George Allen & Unwin Limited, The Gresham Press, Old Working, Surrey, England.
Sassone, Peter G. and Schaffer, William A. (1978). Cost-Benefit Analysis A Handbook. Academic Press, New York, NY.
Schmid, A. Allan (1989). Benefit-Cost Analysis. Westview Press, Boulder, Colorado.
White House (1994). Memorandum For Heads of Executive Departments And Establishments: Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs. Circular No. A-94 Revised [on-line]. Available: http://www.whitehouse.gov/WH/EOP/OMB/html/circulars/a094/a094.html





Prepared by

John G, Richardson, EdD, Extension Program Delivery and Accountability Leader, NC
Cooperative Extension Service.

Richard E. Phillips, PhD, Associate Director, NC Cooperative Extension Service.



Appreciation is expressed to the reviewers who offered many valuable suggestions:

Donald Cobb
R. David Mustian
James Stephenson
Sandra Zaslow


For additional information contact the Department of Agricultural and Extension Education, 117 Ricks Hall, Campus Box 7607,
North Carolina State University, Raleigh, North Carolina 27695-7607


|| North Carolina State University || Cooperative Extension ||





Published by: NORTH CAROLINA COOPERATIVE EXTENSION SERVICE


Table of Contents



Created April 24, 1996
Updated May 15, 1997

created by Michael Ebbs