Five hundred dollar toilet seats got a lot of press during the Reagan administration. That’s the amount that a defense contractor charged, or was alleged to have charged the Pentagon for toilet seats sometime during the Reagn administration. While there may been an element of opportunism in that pricing scheme, if indeed the story was accurate, what it really shed light on is an accounting issue — allocating indirect costs — that has confounded experts since the first double entry accounting system was invented in the basement of a Medieval pizza shop in Venice. (OK. No basements in Venice)
It’s pretty simple. If my company operates multiple factories, I have direct costs, such as raw materials, rent and labor, which relate directly to the goods produced in each factory. But what about indirect costs, such as administration, research and development, legal compliance, staff retreats on Fiji and the like? If I am trying to figure out how much it costs to operate each of those three factories, I not only have to add up the direct costs of each factory. I also have to make a decision about how to allocate the indirect costs.
Pro rata — share and share alike — almost never works. For example, maybe a lot of that back office activity consists of legal compliance that relates only to one of the three factories, the one that produces the product for a highly regulated industry. Or maybe one of the factories requires much more technical investment than the other two, so that a disproportionate share of research and development costs should be allocated to production at that factory.
As a contemporary example of how the issue continues to confound policy makers and to tangle public debate, consider the question of whether charter schools get more money — or get less, as charter school advocates insist — than non-charter public schools. Don’t be surprised if I tell you that the Baltimore City school system doesn’t have a terrific handle on its considerable indirect costs, that is, the costs that aren’t spent directly in the classroom in the form of teachers and classroom supplies.
To give you a sense of the problem, consider that of the $11,000 or so of funding that the city school system gets to spend on each child in the system, less than half of that is paid to charter schools in cash. That means that about $5,500 out of the $11,000 that the school system says it is paying for each charter school student is in fact spent, in some fashion, and in accordance with some accounting norm (is abnorm a word?), by North Avenue rather than by the charter schools themselves.
Now remember that the school system, just like that hypothetical manufacturer with multiple factories, has to figure out how to allocate a gazillion dollars of indirect costs, some of which are counted against that $5,500 per student charter school money and some of which are not. And remember that the school system is also juggling costs of non-charter schools, special education, facilities maintenance, central administration, human resources, procurement, testing, curriculum and other essential but rather complicated tasks.
Here’s the bottom line: the school system can say that it’s spending $5,500 of that $11,000 on each charter school student, but how do we know if that $5,500 includes the school system equivalent of $500 toilet seats, or truly represents an out-of pocket expenditure on behalf of a charter school student, such as the salary of a special education instructor?
I’m here to tell you that I don’t know, and that you don’t know. So when you hear someone pronounce on the importance of not letting the charter schools grab more than their share of education dollars, pronounce on the importance of recognizing the difficulty of allocating costs, and pronounce on the unfortunate but undeniable inability of the city school system to account fairly for its finances.