Identify the main features of the budgetary system

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Case Study: Fantasy Planet University

Fantasy Planet University is a former polytechnic which became a new university in 1992. One of its major departments is the Business School, which comprises 90 academic staff and 20 administrators. The School is led by a head of school and split into five divisions - Strategy, Enterprise, Accounting and Finance, Human Resource Management and Professional Courses; the latter teaches the courses provided by the School. Research is carried out in the School but has to be covered by the teaching and consultancy income the School earns, as the research assessment exercise found the quality of research did not reach a sufficient standard to attract government funding.

The budget for the School is approximately £9 million in 2003/04. There are over 5000 full-time equivalent students who are taught on undergraduate, postgraduate and professional courses. In 2003/04, 45% of the income for the School is payable into the centre to support non-teaching departments such as the library, computing and the directorate of the University. Approximately two-thirds of the sum payable to the centre is used to fund support departments such as Finance, while the remain- ing third is used to provide a Strategic Adjustment Fund and capital projects. The Strategic Adjustment Fund is used to help fund schools where student income is insufficient to meet the schools' costs. Such funding is only provided for a maxi- mum of three years to allow the School to develop plans to turn itself around. After that date the School must be self-financing through whatever means. This includes potentially closure and certainly staff redundancies to bring cost and income into balance.

Up until 2000/01 the Business School was a ‘cash cow' for the University but there has now been a downturn in demand for business courses since that date. Due to a feared shortfall in funding across the University in 2000/01, targets for the School were increased by the University's central directorate. In 1999/2000 actual income was £8 million, but the target for 2000/01 was set at £10 million based on increased student numbers. Actual income was £9.5 million. Target income was again increased in 2001/02 to £10.5 million. Actual income was again below target at £9.6 million. The deduction in 1999/2000 for support costs was 40% of target income, but this was increased in 2001/02 to 45%. The target income was reduced in 2002/03 to £9.5 million but actual income fell to £9 million. In 2003/04 target income remained at £9.5 million and in April 2004 it was anticipated that a small surplus would be made in 2003/04. Prior to 2002/03 income was paid by the funding body to the University for teaching purposes on the basis of enrolments. From 2002/03 income is only paid if students complete the assessments set. This means that no funding is available for students who fail to submit any assessment and drop out. The funding body has also reduced the amount payable to try to ensure the University makes efficiency gains. The centre still takes 45% of target income as the contribution to central costs.

The bulk of the costs of the School are staff costs. Supplies and services costs (photocopying, transport, etc.) have been as high as 20% of the expenditure budget. Limited monitoring information is provided during the course of the year and the School has developed its own internal monitoring systems. This has resulted in sup- plies and service costs being reduced to 12% of the expenditure budget by 2003/04. Additional staff were recruited (5) in 2001/02 and there is a need to find increased pension costs and national insurance taxes. Staff levels have remained consistent since 2001/02.

The Business School also undertakes consultancy activity. This is commercial work charged at commercial rates and is outside the government grant. The University system is that 20% of the income from consultancy is paid to the University's consul- tancy company for undertaking the relevant administration associated with the activ- ity, 20% is payable to the Business School, and the balance is payable to the staff member who undertakes the activity. The Business School also employs outside con- sultants to undertake these activities. The payment system is the same as for internal staff. At the end of the year the Business School's share of the income is transferred to the School from the consultancy company but there is no knowing what this transfer is until the end of the year, although again the University provides a target for the School to achieve.

It is now half way through 2004/04 and the Business School has a cumulative deficit of £2.5 million and has approached the centre for support from the Strategic Adjustment Fund. The University's directorate is currently considering this request.

Finally, the Business School is also to reorganise into four new departments which will act as profit centres in the next academic year.

(i) Identify the main features of the budgetary system outlined above.

(ii) Comment on any advantages and disadvantages that may exist in respect of the features you have identified.

(iii) What would you advise the Business School to do about the situation?

(iv) What would you advise the University's directorate to do and why?

(v) How would you reconcile your advice to the School and the directorate where it differs?

(vi) What issues would you need to consider in establishing the new profit centres?

Reference no: EM13878676

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