Managerial Accounting — Budgeting 1 &
(1) Is this a static or flexible budget?
Since many of the budget line items are based on student enrollment, this budget format is considered to be a flexible budget. The costs of providing instructors and associated benefits is fixed by the state with regard to the ratio of students to teachers, and students per classroom (which is more a function of fire codes and building codes, but it is still a determinant with regard to budget flexibility). The expenses associated with the school facility are fixed and generally cannot deviate in response to increases or decreases in enrollment. Personnel and plant costs are two major items in the school budget, and neither provides options for flexibility. That said, much of the proposed budget is based on student enrollment scenarios — of which there are three at 120 students, 100 students, and 66 students. As we will see in the response to question #5 below, the budget scenario constructed for student enrollment at 66 students is not viable since the breakeven point is 77 students. As this figure can be determined in advance — given the appropriate figures or estimates — a more functional budget would have provided a third scenario, perhaps in the range of 150 students, should the school plant be capable of handling a student body that size.
(2) What is total revenue (excluding grants) per student?
The per student revenue less grant funding is $6,063.06
(3) What are total expenses per student?
The per student expenses are based in part on the number of students enrolled in the charter school. For an enrollment of 120 students, the expenses total $4,518.00, for 100 students, $5,283.00, and for 66 students, $7,646.00. These figures reflect an economy of scale that is based on the regulated fixed costs (Hermanson, et al., 2011). In other words, budget accommodations cannot be made for half of a classroom, or a third of a general Internet charge. Although it is possible to adjust the budget with part-time teaching staff, it is not possible to hold full-day classes with only part-time staff, even if a combination of staff members can represent a full-time equivalent (FTE) on paper.
(4) Do all expenses seem necessary?
Given that this operation is a charter school, an educational enterprise that relies on meeting certain standards of quality, meeting state and federal requirement, and on its general reputation, there do not seem to be any current expenses that can be eliminated. It might be possible to postpone the technology enhancements, but we don’t have access to the budget justification that would provide more detail to indicate whether this is possible or recommended. In addition, activities such as grass removal might be optional or could be addressed with parent, student, and booster club volunteers — but for a charter school that is launching, this is not likely to be as well-received as if the school had been a going enterprise for some time with a loyal body of enthusiastic supporters.
(5) Is this school viable? How many students does the school need to break even (show your calculations with analysis and state your assumptions for break-even)?
(Note: For break even analysis — Ignore revenue received as “Grants” and “Startup Costs” (Schedule A).
The school does appear to be capable of conducting a viable enterprise, as long as student enrollment stays at about 100 students or so. If enrollment figures drop to 66 students, the school will be operating in the red (-$29,492). The primary issue with breakeven analysis in the public school sector is that certain fixed costs are under regulatory control and cannot be adjusted (Richards, 2013).
Breakeven Point = Fixed Costs/(Unit Selling Price – Variable Unit Cost)
Fixed Costs = $458,937 @120; $458,917 @100; $458,
Unit Selling Price (revenue received per student per enrollment) = $6,[email protected]; $6,813 @ 100; $7,
Variable Unit Cost = $483,460 @120; $69,550 @100; $45,
Breakeven Point = $458,937 / ($6,688 – $694.50) = 76.57 or 77 units
Unit Contribution Margin = Sales Price – Variable Costs
Sales Price = = $6,[email protected]; $6,813 @ 100; $7,
Variable Costs (per student unit) = $694.50
Unit Contribution Margin = $6,688 — $694.50 = $5,993.50
(6) What are the general benefits of preparing this budget?
This budget format provides a fundamental understanding of the relationship between student enrollment and the fixed costs that the charter school must incur in order to operate as a public school entity that receives state and federal flow-through funds. Moreover, the budget permits some manipulation of variable costs that could feasibly be implemented during the start-up phase and initial years of the founding of the charter school. The assumption is that any optional reduction in variable costs could be addressed in subsequent years as the school builds a reserve fund.
(7) Discuss how this budget is likely to be used for the control function.
The budget provided can be used for control purposes by the principal or dean of the school to monitor the spending across the terms. Operational efficiency is critical in a small organization such as this, particularly during the launch and the initial years of providing the program (Churchill, 1984). The primary focus of the control function during the start-up is to ascertain what percentage of the funds are spent each quarter in order to forecast the need for spending modifications that might be possible given an identified need. Moreover, operational performance reflected on the budget for the initial year can inform budget development, decision-making, and management in subsequent years. In addition, a charter school is likely to budgetary skills as part of the performance evaluation of the program director or school principal.
(1) Variance analysis is a traditional tool used for planning and control. Comment on advantages and disadvantages of using this approach for performance evaluations.
A variance analysis shows the deviation between what the actual expenditures are and what has been budgeted. Knowing whether an operation is over budget or under budget is insufficient. For control purposes, the principal or program manager will need to be able to figure out why deviations are occurring and determine how to correct for those deviations. Some deviation is typical in operations, and the ability of a manager to get the numbers back on track is generally an important aspect of their performance evaluation. Operations performance should be a holistic undertaking that examines the overall net effect of having a line item or two deviating from the budget. It is important to remember that budget deviations can be both positive and negative, with over budget items and under budget items cancelling each other out. The net result can still be acceptable, so measures to adjust the budget should generally proceed after careful scrutiny and some historical analysis. Naturally, when an enterprise is just launching, there may not be any historical figures to compare to the current budget, so cyclic or seasonal spending variations may not be particularly evident (Walter, 2011). Generally, a budget is developed with the idea that revenues will meet or exceed the budget parameters and that the costs and expenses will be within the budget parameters (Walter, 2011). However, this is very often not the way that things progress for a start-up enterprise (Walter, 2011). In this case example of a charter school, it is important to note that the revenue per student actually increases as the enrollment drops. This is due to the static nature of the grants, which are not adjusted for enrollment numbers in the manner of state and federal flow-through dollars in education, and due to the TRA Reduction, which is adjusted on a student enrollment basis, rather than an institutional basis. When comparing the revenue per student with the expenses per student, it becomes apparent that the school will pay more to provide educational services for students when enrollment is lower than when it is higher. This dynamic, is underscored by the breakeven point of 77 students for the current proposed budget at an enrollment level of 120 students.
(2) Do you have any suggestions for complementary or alternative performance measures?
For a charter school during its launch year, it would be beneficial to keep an eye on interest generated in the school during the first semester to see if advanced registration is occurring at a level that will replace those who matriculate out of the highest grade. Since enrollment drives both revenue and expenses in the school environment, operational performance — and managerial performance, for that matter — are inexorably tied to student numbers.
Churchill, N.C. (1984, July 1). Budget Choice: Planning vs. Control. Harvard Business Review. Prod. #: 84403-PDF-ENG. Retrieved http://hbr.org/product/budget-choice-planning-versus-control-harvard-busi/an/84403-PDF-ENG
Hermanson, R.H., Edwards, J.D., & Invacevich, S.D. (2011). Accounting Principles: A Business Perspective. (1st ed.). Managerial Accounting. Retrieved http://textbookequity.com/oct/Textbooks/TBQ_PA_Accounting_managerial.pd
Richards, D. (2013). Entrepreneurs. About.com. Retrieved http://entrepreneurs.about.com/od/businessplan/a/breakeven.htm
Walter, L.M. (2011). Principles of Accounting: A Complete Online Text, chapters 21 and 22. Retrieved from http://www.principlesofaccounting.com / [Type text] [Type text] [Type text]
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