- According to the form of presentation, the charter school budget is a flexible budget. It represents the budgeted data for different levels of activity. The different levels of activity in this budget are the different numbers of students. I.e 120, 100 and 66 students.
- The total revenue per student excluding grants can be shown as follows:
Total revenue = 3546+1775+170-42.44+246.5+368
=$6063.06.
- The total expenses per student can be calculated as follows:
Total expenses = 100+40+150+60+98+246.5
=$694.5.
It is worth noting that the figure above represents the expenses per student. These are those costs/expenses that can be directly traced to an individual student. The other costs like insurance, telephone and transportation are fixed and therefore not attributed to individual student.
- According to the budget, all expenses are necessary for the survival of the school at its full operational capacity. For instance, an omission of one expense will imply a service lost by the school. The absence of such a service/facility, for example telephone, will impair the smooth operation of the school.
- Viability of the school can be examined by calculating the operating income as follows:
Let x represent students.
The operating income function will be, total revenue (grants exclusive) – total expenses
Total revenue for the school=$6063.06x
Total expenses per student=$694.5.
Total variable expenses for the school=$694.5x.
Total fixed costs = $458,817
Operating income =$6063.06x-$694.5x-$458,817
= 5368.56x-458,817
At break-even the above equation should be equal to zero.
Therefore, 5368.56x=458,817
X=458,817/5368.56
=86 students.
- This kind of budget has several benefits as follows: it provides room for adjustment for different predictions, it’s easy to adapt to change due to its element of flexibility, it can serve as an efficient tool of monitoring and evaluation and can be used for decision making even in times of inflation.
- The budget can be used as a control function to check the costs and control any unexpected variances. This serves as a control both during the budget and the post budget periods because it shows where the actual performance deviated from the budgeted performance hence corrective measures. The short timelines and massive points of changes in the budget also eases the evaluation of profits.
Part II
Advantages of variance analysis
- It serves to identify undesirable performance to spur corrective actions.
- It makes result oriented managers and supervisors by ensuring that they are all focused.
- It encourages optimal performance of the organization and serves as a form of communication between the staff within the organization.
- It serves to motivate employees to achieve the predetermined goals.
Disadvantages of variance analysis.
- It discourages innovations and creativity on the part of employees especially if such will result in negative variances.
- It may result to inappropriate decisions which could lead to a collapse of the organization especially if the information used was defective.
- Employees may be tempted not to act in the best interest of the company so as to cover up or prevent negative variances.
- Managers could turn insensitive and use the inappropriate tools to achieve the positive variances.
Suggestions
It is advisable for all organizations to embrace different methods of performance measurement to compensate the shortcomings of each method. The sole reliance on one method of performance measure could end up misleading the organization into tragic mishaps in the business. Such other method could include management by objectives and ABC costing.
References
Agrawal, N. K. (2010). Principles of Management Accounting, Global Media , Trident online library.
Hermanson, R.H., Edwards, J.D., & Invacevich, S.D. (2011). Accounting Principles: A Business Perspective. Trident online libraryWalther, L.M. (2010). Principles of Accounting: A Complete Online Text, Retrieved from http://www.principlesofaccounting.com.
Hongren C.T, Sundem G.L & Stratton W.O (2007), Introduction to management accounting, 13th edition, New Jersey, Prentice Hall Inc.
