Prepare an operational budget of your institution keeping in mind of the changing demands of
higher educational institutions.
The process of building an operating budget should be an orderly one. It is important to use one’s best estimate for each component of the budget. While it is impossible to know the future and thus there is always the risk of underestimating or overestimating revenues and expenses, it is still important that one create a budget that is as close to expected reality as possible.
Expenditures:
It is essential to understand cost behavior and cost drivers in order to measure the cause and effect of various decisions. Costs can be viewed from two perspectives. Costs may be fixed or variable. They may also be direct or indirect. Fixed or variable costs can be understood in terms of the cost linkage to the organization’s volume of activity—which is generally measured by its revenue. Costs that stay the same when activity volume increases (or decreases) are fixed costs. Costs that increase (decrease) in proportion to activity volume increases (or decreases) are variable costs.
Many costs are neither fixed nor variable, but a combination of the two. In not-for-profit organizations like schools, most costs are fixed, at least until capacity is reached, when another jump in fixed cost is added. For example, dormitory costs for heat and light and depreciation do not immediately go up or down, depending on the number of students in the building. Eventually, however, if the institution grows, another dormitory must be added. At that point the fixed costs related to the dormitories take a major bump upward.
Direct costs are incurred for the benefit of just one product or service. Indirect costs are incurred for the benefit of many products or services. Indirect costs are often called overhead, and are shared across departments or projects. Top administrative costs are indirect costs and are shared across all departments in an organization, whereas a faculty salary for teaching only accounting courses would be a direct cost to the accounting department. All costs are tied to activities. The more complex the activity becomes, the greater the expense.
The importance of tying the cost to the activity was recognized in the manufacturing field in the late 1980s and resulted in the development of activity-based-costing systems. The basic philosophy behind activity based costing is that since activities consume resources, the first step is to identify the activities involved in
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