Estimating the cost of elearning is critical before embarking on a new elearning program. To make decisions about the program, management not only needs to know how much it will cost to develop the elearning, they also need to know what the cost of production will be. So this article addresses the distinction between development and production costs and why it’s important make that distinction. It also covers how to determine whether an elearning cost is a development cost or a production cost.
Management needs to know the cost to develop elearning for a few reasons. The primary reason is to determine how much they will need to budget for the development project. They also use the amount to estimate how long it will take to reach a break-even point and then to estimate what the return on the investment will be. For organizations that charge customers a fee to license the elearning, management can use the amount to help set the pricing.
Finally, the cost of development is used to establish the value of elearning as a capital asset. The cost of developing elearning is not a direct business expense. Instead, the elearning is accounted for as the organization’s capital asset. Then the organization amortizes the asset’s value by depreciating it, so the development cost is expensed over the life of the elearning instead of when it’s developed.
Production costs, on the other hand, are expensed at the time they are incurred. Although they are typically much less than development costs, there are still costs involved in delivering elearning to learners (and customers, if they are not one and the same). Therefore, production costs also play a role in establishing pricing. It’s important to get reasonably accurate estimates of both types of costs for the financial success of the elearning, so mistakenly counting production costs as development costs (or vice versa) can have a detrimental impact on management planning and the organization.
Determining type of costs
One basic test for development costs is to determine if the costs would be incurred only in the event the course is developed. Costs that would be incurred even if the elearning was not developed would not be development costs. If the one and only time in which the costs would be incurred is during development, they are development costs. One notable exception is the cost of an elearning development software license incurred while development is underway. That cost is usually considered a general and administrative expense unrelated to the elearning because the software could presumably be used in later elearning development projects. Elearning costs incurred after development is completed are not development costs.
Development costs include research directly related to the curriculum, such as a needs analysis or study of practice. Even the costs of staff involved in development are development costs because that staff would presumably be doing other work that needs to be done if they weren’t participating in the development. This is calculated by multiplying the burden rate (which includes not only wages but also additional costs the organization incurs from employing the staff—the finance department should be able to provide the burden rate) for that staff member by the amount of time they spent on development. Development costs include not only the costs of developing the first version of a course but also the costs of later making a major revision to a course.
Elearning costs incurred while it’s still in development are not production costs. Production costs kick in when the curriculum is released into production and go on indefinitely. Many production costs vary directly with the level of production, such as LMS usage fees. For example, let’s say 100 learners are registered in the LMS so they can access the e-learning course. The LMS provider charges $2.50 per user per month in fees for those users. Each month, the accounting department would immediately expense $250 for the LMS. Other production costs are set at tiers, such as courseware storage. Some even have a fixed component. Fulfillment, event production, and support activities all qualify as production costs, so the organization allocates a portion of the payroll expenses of staff involved in such activities (again using their burden rate) to production costs according to the staff’s participation in production activities.
While the costs of minor revisions to the courseware after it is released are typically expensed as a production cost, the costs of a major courseware revision are typically treated as development costs. Production costs and development costs are mutually exclusive of each other. No elearning cost should be accounted for as both. Separate all the elearning costs into their correct type, then sum all the development costs and report them to management as a single amount. Calculate the production costs and report them to management as an amount per time period—usually monthly—and/or an amount at a certain level of production (e.g. number of learners) because they will be incurred ongoing as long as the elearning is in production.