According to Hermanson (2011), static budget is based on the projected level of output and does not change significantly with the changes in activity, while flexible budget provides different cost levels, depending from the projected amount of output.
We may claim that Charter School Budget is flexible, as it suggests several scenarios, and reflects changes in cost structures depending on the amount of output. We may also observe that total revenues of the charter school are divided into two different types: revenues and grants. While the amount of revenues depends on the amount of students enrolled, the amount of grants remains fixed at all levels of enrolment and equals $75,000. Revenue per student excluding grants might be calculated by dividing the sum of revenue column by total number of students. The resulting revenue per student will be fixed at $6,063.
There are certain fixed and variable costs presented in the charter school budget. Fixed expenses equal $458,817 at all levels of enrolment. Variable expense per student equals $694.5. As a result, we may see that total cost per student tends to decrease, as the number of student enrolled increases. This might be explained by the fact that fixed cost per student decreases with each additional student enrolled. Total expenses per student at the level of enrolment of 120, 100 and 66 students are $4,518, $5,283 and $7,646 respectively.
It is difficult to say whether all listed expenses are necessary, as we do not have enough information about the nature of these expenses and their influence on revenues. For instance, computer equipment is a fixed cost of $25,000 in each of the scenarios. If the cost of equipment could be reduced, the profitability of the school might be increased. However, low quality of computer equipment might deter new students from entering the school, which may result in additional losses. If we were able to analyze elasticity of demand on the school’s services, we would be able to improve school’s cost structure without reducing the demand for the school’s services.
On the other hand, some cost improvements might be implemented without affecting the quality of services. For instance, utility costs may be reduced if school implements new policies on using electricity and water supply. Board may promote usage of energy-efficient devices or motivate staff and students to turn on the lights only during dark hours. In addition, school management might negotiate new contracts with services providers to ask for discounts and additional benefits. These actions might improve cost structure of the charter school.
Budget of the charter school provides us with clear information on fixed and variable costs, as well as gives reasonable results from operating activity depending on the amount of students enrolled. Classification of fixed and variable costs gives us the opportunity to perform a thorough cost analysis and improve school’s cost structure in different components. The breakeven point assesses levels of enrolment at which school would be viable, thus, providing us with information at which level of enrolment the school will be able to cover its costs.
At the end of the accounting period we may compare actual costs and revenues to projected ones. As soon as actual results will be available, we may perform variance analysis, and evaluate school’s financial performance throughout the year. Favorable and unfavorable variances will give us information on how well the planning function was performed and how well cost and revenue standards were met. Control procedures will provide vital information about school’s revenues and expenses and will help to define methods how to make cost structure more efficient and improve financial credibility.
Variance analysis is a great tool to measure financial performance of a company throughout accounting period. By comparing standard costs to actual costs we may draw conclusions about the nature of the variance and find solutions on how to meet budget targets. Variance analysis allows us to analyze different cost and revenue items and highlight the problems in cost and revenue structure. It is almost certain, that variance will occur in most of the budget items, as it is almost impossible to predict costs and revenues precisely. For this reason, management has to establish some variance benchmarks for each budget item. If the variance exceeds the benchmark, management has to analyze the nature of the variance more precisely. Overall, variance analysis helps to measure performance based on established standards and highlights exceptional items which require further investigation.
It should be noted, however, that variance analysis could be performed only after actual information about the accounting period is available, and sometimes it takes a lot of time to produce these figures. As a result, variance analysis not always may be performed in a timely manner, which means that management may be late in implementing corrective procedures. In addition, variance analysis gives only quantitative information about company’s performance. If managers relied solely on variance analysis during their operations, the quality of their products and services would be affected. For instance, if charter school board decreased salaries and benefit expenses for school’s teachers, the variance might be favorable, which would be perceived as a good thing. On the other hand, decrease in salary expenses may deter qualified teachers from the school, the quality of education might be decreased and school’s reputation may suffer. For this reason, school board should implement additional performance measures of school’s operations. For example, they might conduct qualitative surveys and assess student’s satisfaction with the school. These surveys will help to understand students’ needs and as a result, restructure expenses in accord with those needs. Periodical assessment of teachers should also be conducted in order to guarantee that school employs staff of high quality. To sum up, it is quite important not only to perform quantitative analysis of school’s budget, but also to analyze qualitative factors of school’s operations. Therefore, a combination of variance analysis and quality control may guarantee successful performance of the charter school.
Agrawal, N. K. (2010). Principles of Management Accounting. Global Media.
Hermanson, R.H., Edwards, J.D., & Invacevich, S.D. (2011). Accounting Principles: A Business Perspective. First Global Text Edition, Volume 2 Managerial Accounting. Retrieved from http://textbookequity.com/oct/Textbooks/TBQ_PA_Accounting_managerial.pdf
Walther, L.M. (2010). Principles of Accounting: A Complete Online Text. Retrieved from http://www.principlesofaccounting.com/