Cost allocation in the research university and what it tells us

Universities often report a number that appears to indicate how much the university spends on instruction. We might believe that this number accurately represents teaching expenses and even do some analysis based on that belief. We would be wrong to do so. 

John V. Lombardi, in How Universities Work

This somewhat cynical observation by Lombardi was informed by his broad and sometimes painful experiences as Provost at Johns Hopkins University, President of the University of Florida, Chancellor of the University of Massachusetts at Amherst, and President of the Louisiana State University System. However, in these times of heated discussions over who should pay for higher education and a background of rapidly increasing student debt,  it is important to have some idea of what the actual costs of producing that education are. In this post, I review some of the reasons why it is difficult to define the instructional costs at a research university, and why various constituencies might not want that information to be generally available. After discussing how a business model view simplifies some of the issues around calculating instructional costs, I describe a recent analysis of such costs in the University of California system, which reaches some surprising conclusions. These conclusions lead to a consideration of why cost -shifting between missions is so important in the current approach of the research university. Taken together, these results suggest that one of the key issues that should be focused on in order to control higher education prices are the synergies between the different functions of the research university and the actual "added value" to the customer of those synergies. In particular, the analysis suggests that rising prices in undergraduate education are not likely be controlled unless society finds alternative ways to fund a significant component of the cost of university research.