Allocating University Administrative Costs in a Responsibility-Centered Management (RCM) Model Introduction Last Friday, President Harold (Harry) Hampton and Brad Gordon, Vice-President of Finance, at Coastal State University (CSU) met with Provost Susan Spencer and the deans of the four colleges at the university, CSU's four academic colleges are the College of Business (COB), the College of Education (COE), the College of Humanities (COH), and the College of Sciences (COS). This meeting was used to discuss a new Responsibility-Centered Management (RCM) Budget Model that Brad Gordon has been working on over the past couple of years. Historical Information about CSU President Harold (Harry) Hampton became the 15" president of CSU in 2013. Because of his RCM experience at his previous institution, he felt that the RCM model would work well at CSU to line up academic college budgets with its revenue generation. In recent years, the state legislature has provided less state support to CSU, but it did give university presidents the authority to raise tuition under certain parameters. Therefore, CSU raised its tuition by 12 percent per year from 2014-15 to 2017-18. Additionally, they raised its tuition by another 10 percent in 2018-19 and 2019-20. When Brad Gordon was hired as the new Vice-President of Finance in the fall of 2016, President Hampton asked him to start developing a new budget model using RCM principles for the university. While no formal committee was created to work with Brad, he did assign this task to a couple of individuals that worked for him. President Hampton favored the RCM model at his previous university and wanted to keep the RCM model at CSU simple. Therefore, he wanted to allocate all revenues to each college using student credit hours (SCH) and the number of majors, and allocate administrative costs as a percent of revenues. The college deans referred to this method of allocating administrative costs as a revenue tax. RCM is a combination of policies and practices that attempts to couple decision making directly to the associated financial ramifications. RCM is a budget model that prescribes precisely how revenues and costs are shared between responsibility centers. RCM allows decision-makers to be rewarded for good financial decisions that benefit the entire university. In theory, each unit receives its tuition and a portion of the governmental support based on a prescribed formula. In turn, each unit must pay for its expenses, as well as a portion of the university's general operations or administration from these revenues. Tuition and state appropriations are generally allocated based on student credit hours (SCH), the number of majors, and sometimes the number of graduates in an RCM model. College and University Budget Information for CSU Brad started the meeting by sharing several Tables. In Table 1, he provided the previous year's budgets, along with the student credit hours (SCH) and the number of majors (MAJORS) in each college. President Hampton decided that each college would receive 75 percent of its revenues based on SCH and 25 percent based on MAJORS. Additionally, he decided that administrative and overhead costs would be assigned as a revenue tax, or as a percentage of revenues. The revenue tax was determined to be 53 percent of revenues, or $159,000,000 in administrative costs divided by $300,000,000 in revenues. Tablo I also provides the revenue ratios for each college. The revenue ratio for the College of Business was found by (75% 11.0%)+(25% x 18.0%), or it is 23.000%. The revenue ratios for the other colleges were calculated similarly Table 1 Prior Period Budgets, Student Credit Hours, Number of Majors and Revenue Ratio (Budgets are in millions) Prior Year SCH MAJORS Revenue Budgets (75%) (25%) Ratio COB S21.00 66,000 3,060 12.750% (11.00%) (18.00%)** COE 38.90 162,000 5,525 28.375% (27.00%) (32.50%) COH 33.80 147,000 3,145 23.000% (24.50%) (18.50%) COS 47.30 225,000 5,270 35.875% (37.50%) (31.00%) Total $141.00 600.000 17,000 100.00% The SCH percentages are found by taking the college's SCH and dividing it by the total SCH for the university. For the College of Business, 66,000/600,000 equals 11.00%. The SCH percentages for the other three colleges are found similarly. **The MAJORS percentages are the number of majors in the college and divided by the total number of majors at the university. For the College of Business, 3,060/17,000 equals 18.0%. The MAJORS percentages for the other three colleges are found similarly. Next, Brad presented Table 2 which shows the calculations for the RCM budget for the College of Humanities. Additionally, he compared it to the prior year's budget to determine the change in the budget. Based on the calculation in Table 2, the RCM budget would be $17.977 million for the College of Business which is $3.023 million less than the prior year's budget. Table 2 Simple Calculation of RCM Budget and Comparison to Prior Year's Budget for the College of Business (in millions) $300.000 Total Tuition Revenue Ratio from Table 1 12.750% $38.250 Allocated Revenues 20.273 $17.977 Allocated Administrative Costs (52% of Revenues) RCM Budget Prior Year Budget from Table 1 Difference 30.000 ($3.023) Finally, Brad provided Table 3 which summarizes the RCM budgets, prior year's budgets, and differences for all colleges. The RCM budgets for the College of Education, the College of Humanities, and the College of Sciences are found similarly using Table 2. College Table 3 RCM Budget Comparisons (in millions) RCM Budget Prior Year's Budget $17.977 $21.000 40.009 38.900 Difference (83.023) COB COE 1.109 COH 32.430 33.800 (1.370) COS 50.584 47.300 3.284 Total $141.00 $141.00 At this time, Dr. Alfred English, the dean of COH asked Brad, "How comfortable are you with the 75-25 rate for revenue allocations? Why not 80-20 or 70-302 Besides that, the costs to 4 teach general education classes are cheaper to teach than upper-level classes. You can teach general education classes in large lecture halls and hire an inexpensive adjunct to teach it. Based on my numbers, COB, COE, COH, and COS had 0,62,000, 27,000, and 111,000 SCHs in general education classes last year, respectively. Should we be concerned about this?" Then Dr. Beth Sanders, the dean of COB, added, "Yes, not having general education classes in my college is a disadvantage. Additionally, we have a policy of allowing students to declare and become majors in their junior year after completing their general education and other prebusiness classes, such as required economics, accounting, English, mathematics, and business law classes. Therefore, we can count our majors for only two years, while other colleges can count their majors for four years. While we only have 18 percent of the majors, we do represent 27 percent of the students graduating. Based on a recent report, the percentage of students graduating from COB, COE, COH, and COS were 27%, 25%, 20%, and 28%, respectively. What if we allocated revenues 70-20-10 based on SCHs, the number of majors, and graduation rates, respectively." At a previous meeting a couple of weeks ago, Dr. Sanders told Brad that the COB has a small footprint on campus. We share a small building with COE, have a small number of employees, and have no graduate program. She told Brad that it seems a little unfair to be charged 53 percent of our revenues in the new model. In response, Brad provided some additional information in Tables 4 and 5. In Table 4, Brad assigned the $159 million to five cost pools with potential drivers. Table 5. provides college information on three of the drivers, while the number of majors was provided in Table. I. A new revenue tax rate will need to be recalculated Table 4 Budgeted Costs (in millions) and Activity Drivers Type of Costs Budgeted Costs Potential Driver Facilities Related Costs $40.00 Square Footage Human Resources Costs 10.00 # of Employees Graduate Studies Costs 5.00 # of Graduate Students Student Related Costs 15.00 # of Majors Other Administrative Costs 89.00 Revenue Tax Rate Total $159.00 Table 5 Activity Driver Data per College Square Footage # of Employees College # of Graduate Students COB 40,000 75 0 COE 210,000 225 150 COH 120,000 200 100 COS 430,000 300 250 Total 800.000 800 500 Required At this time, President Hampton has challenged Provost Spencer to work with the deans of the four colleges to develop suggestions to improve the model. Thus, Provost Spencer has asked each dean to return to their executive teams to examine the information and present suggestions at their next meeting in two weeks. In closing, Provost Spencer commented that it is important to maintain a comprehensive University and not pitone College or Department against another. SOLUTIONS TO ASSIGNMENT QUESTIONS (Coastal State University): Most of my questions during the presentation will be around these proposed changes. Will the proposed changes be beneficial to your college Phase provide me with a filo of your antalysis before the presentation. Thanks! Proposed Change Allocate revenues based on 70% SCHs and 30% the number of majors Allocate revenues based on 80% SCHES and 20% the number of majors Allocate revenues based on 70% SCHS, 20% number of majors, and 10% graduation rate Allocate revenues based on 80% Non GE SCHs and 20%, the number of majors Allocate a portion of the costs based on square footage Allocate a portion of the costs based on the number of employees Allocate a portion of the costs based on the number of graduate students Allocate a portion of the costs based on the number of majors 1. After reading the case, calculate the RCM Budgets for the remaining three colleges similar to Table 2. 2. Calculate the new RCM budgets for each college assuming that activity-based costing is being used to allocate overhead. 3. Calculate your RCM budget assuming the revenue allocation ratios change (Use the two percentages provided in your case). 4. Calculate your RCM budget assuming that you use non-general education SCHs and Majors to allocate revenues. 5. Calculate your RCM budget assuming that you allocate revenues based on SCH, Majors and Graduates. 6. Will you benefit by allocating part of the overhead based on square footage? Based on number of employees? Based on number of graduate students? Allocating University Administrative Costs in a Responsibility-Centered Management (RCM) Model Introduction Last Friday, President Harold (Harry) Hampton and Brad Gordon, Vice-President of Finance, at Coastal State University (CSU) met with Provost Susan Spencer and the deans of the four colleges at the university, CSU's four academic colleges are the College of Business (COB), the College of Education (COE), the College of Humanities (COH), and the College of Sciences (COS). This meeting was used to discuss a new Responsibility-Centered Management (RCM) Budget Model that Brad Gordon has been working on over the past couple of years. Historical Information about CSU President Harold (Harry) Hampton became the 15" president of CSU in 2013. Because of his RCM experience at his previous institution, he felt that the RCM model would work well at CSU to line up academic college budgets with its revenue generation. In recent years, the state legislature has provided less state support to CSU, but it did give university presidents the authority to raise tuition under certain parameters. Therefore, CSU raised its tuition by 12 percent per year from 2014-15 to 2017-18. Additionally, they raised its tuition by another 10 percent in 2018-19 and 2019-20. When Brad Gordon was hired as the new Vice-President of Finance in the fall of 2016, President Hampton asked him to start developing a new budget model using RCM principles for the university. While no formal committee was created to work with Brad, he did assign this task to a couple of individuals that worked for him. President Hampton favored the RCM model at his previous university and wanted to keep the RCM model at CSU simple. Therefore, he wanted to allocate all revenues to each college using student credit hours (SCH) and the number of majors, and allocate administrative costs as a percent of revenues. The college deans referred to this method of allocating administrative costs as a revenue tax. RCM is a combination of policies and practices that attempts to couple decision making directly to the associated financial ramifications. RCM is a budget model that prescribes precisely how revenues and costs are shared between responsibility centers. RCM allows decision-makers to be rewarded for good financial decisions that benefit the entire university. In theory, each unit receives its tuition and a portion of the governmental support based on a prescribed formula. In turn, each unit must pay for its expenses, as well as a portion of the university's general operations or administration from these revenues. Tuition and state appropriations are generally allocated based on student credit hours (SCH), the number of majors, and sometimes the number of graduates in an RCM model. College and University Budget Information for CSU Brad started the meeting by sharing several Tables. In Table 1, he provided the previous year's budgets, along with the student credit hours (SCH) and the number of majors (MAJORS) in each college. President Hampton decided that each college would receive 75 percent of its revenues based on SCH and 25 percent based on MAJORS. Additionally, he decided that administrative and overhead costs would be assigned as a revenue tax, or as a percentage of revenues. The revenue tax was determined to be 53 percent of revenues, or $159,000,000 in administrative costs divided by $300,000,000 in revenues. Tablo I also provides the revenue ratios for each college. The revenue ratio for the College of Business was found by (75% 11.0%)+(25% x 18.0%), or it is 23.000%. The revenue ratios for the other colleges were calculated similarly Table 1 Prior Period Budgets, Student Credit Hours, Number of Majors and Revenue Ratio (Budgets are in millions) Prior Year SCH MAJORS Revenue Budgets (75%) (25%) Ratio COB S21.00 66,000 3,060 12.750% (11.00%) (18.00%)** COE 38.90 162,000 5,525 28.375% (27.00%) (32.50%) COH 33.80 147,000 3,145 23.000% (24.50%) (18.50%) COS 47.30 225,000 5,270 35.875% (37.50%) (31.00%) Total $141.00 600.000 17,000 100.00% The SCH percentages are found by taking the college's SCH and dividing it by the total SCH for the university. For the College of Business, 66,000/600,000 equals 11.00%. The SCH percentages for the other three colleges are found similarly. **The MAJORS percentages are the number of majors in the college and divided by the total number of majors at the university. For the College of Business, 3,060/17,000 equals 18.0%. The MAJORS percentages for the other three colleges are found similarly. Next, Brad presented Table 2 which shows the calculations for the RCM budget for the College of Humanities. Additionally, he compared it to the prior year's budget to determine the change in the budget. Based on the calculation in Table 2, the RCM budget would be $17.977 million for the College of Business which is $3.023 million less than the prior year's budget. Table 2 Simple Calculation of RCM Budget and Comparison to Prior Year's Budget for the College of Business (in millions) $300.000 Total Tuition Revenue Ratio from Table 1 12.750% $38.250 Allocated Revenues 20.273 $17.977 Allocated Administrative Costs (52% of Revenues) RCM Budget Prior Year Budget from Table 1 Difference 30.000 ($3.023) Finally, Brad provided Table 3 which summarizes the RCM budgets, prior year's budgets, and differences for all colleges. The RCM budgets for the College of Education, the College of Humanities, and the College of Sciences are found similarly using Table 2. College Table 3 RCM Budget Comparisons (in millions) RCM Budget Prior Year's Budget $17.977 $21.000 40.009 38.900 Difference (83.023) COB COE 1.109 COH 32.430 33.800 (1.370) COS 50.584 47.300 3.284 Total $141.00 $141.00 At this time, Dr. Alfred English, the dean of COH asked Brad, "How comfortable are you with the 75-25 rate for revenue allocations? Why not 80-20 or 70-302 Besides that, the costs to 4 teach general education classes are cheaper to teach than upper-level classes. You can teach general education classes in large lecture halls and hire an inexpensive adjunct to teach it. Based on my numbers, COB, COE, COH, and COS had 0,62,000, 27,000, and 111,000 SCHs in general education classes last year, respectively. Should we be concerned about this?" Then Dr. Beth Sanders, the dean of COB, added, "Yes, not having general education classes in my college is a disadvantage. Additionally, we have a policy of allowing students to declare and become majors in their junior year after completing their general education and other prebusiness classes, such as required economics, accounting, English, mathematics, and business law classes. Therefore, we can count our majors for only two years, while other colleges can count their majors for four years. While we only have 18 percent of the majors, we do represent 27 percent of the students graduating. Based on a recent report, the percentage of students graduating from COB, COE, COH, and COS were 27%, 25%, 20%, and 28%, respectively. What if we allocated revenues 70-20-10 based on SCHs, the number of majors, and graduation rates, respectively." At a previous meeting a couple of weeks ago, Dr. Sanders told Brad that the COB has a small footprint on campus. We share a small building with COE, have a small number of employees, and have no graduate program. She told Brad that it seems a little unfair to be charged 53 percent of our revenues in the new model. In response, Brad provided some additional information in Tables 4 and 5. In Table 4, Brad assigned the $159 million to five cost pools with potential drivers. Table 5. provides college information on three of the drivers, while the number of majors was provided in Table. I. A new revenue tax rate will need to be recalculated Table 4 Budgeted Costs (in millions) and Activity Drivers Type of Costs Budgeted Costs Potential Driver Facilities Related Costs $40.00 Square Footage Human Resources Costs 10.00 # of Employees Graduate Studies Costs 5.00 # of Graduate Students Student Related Costs 15.00 # of Majors Other Administrative Costs 89.00 Revenue Tax Rate Total $159.00 Table 5 Activity Driver Data per College Square Footage # of Employees College # of Graduate Students COB 40,000 75 0 COE 210,000 225 150 COH 120,000 200 100 COS 430,000 300 250 Total 800.000 800 500 Required At this time, President Hampton has challenged Provost Spencer to work with the deans of the four colleges to develop suggestions to improve the model. Thus, Provost Spencer has asked each dean to return to their executive teams to examine the information and present suggestions at their next meeting in two weeks. In closing, Provost Spencer commented that it is important to maintain a comprehensive University and not pitone College or Department against another. SOLUTIONS TO ASSIGNMENT QUESTIONS (Coastal State University): Most of my questions during the presentation will be around these proposed changes. Will the proposed changes be beneficial to your college Phase provide me with a filo of your antalysis before the presentation. Thanks! Proposed Change Allocate revenues based on 70% SCHs and 30% the number of majors Allocate revenues based on 80% SCHES and 20% the number of majors Allocate revenues based on 70% SCHS, 20% number of majors, and 10% graduation rate Allocate revenues based on 80% Non GE SCHs and 20%, the number of majors Allocate a portion of the costs based on square footage Allocate a portion of the costs based on the number of employees Allocate a portion of the costs based on the number of graduate students Allocate a portion of the costs based on the number of majors 1. After reading the case, calculate the RCM Budgets for the remaining three colleges similar to Table 2. 2. Calculate the new RCM budgets for each college assuming that activity-based costing is being used to allocate overhead. 3. Calculate your RCM budget assuming the revenue allocation ratios change (Use the two percentages provided in your case). 4. Calculate your RCM budget assuming that you use non-general education SCHs and Majors to allocate revenues. 5. Calculate your RCM budget assuming that you allocate revenues based on SCH, Majors and Graduates. 6. Will you benefit by allocating part of the overhead based on square footage? Based on number of employees? Based on number of graduate students