"Wait a minute, did you just say that our MBA program is losing money? How can that be? Enrollment is up by 20% and we have not added any faculty positions." Chris, the Dean of the School of Business was just about speechless during the meeting with the University finance committee. The University was looking at each program and developing five-year projections. For the future financial health of the University, the finance committee was evaluating programs and planning to make recommendations to discontinue the unprofitable programs. Jamie, the finance committee chair, began the meeting by going over performance reports for each of the degreed programs offered in the most recent academic year. Jamie explained the allowances and adjustments as well as the allocation of common costs to each program. Chris immediately objected to the way the performance reports were calculated and the expectation that degreed programs were to be held accountable for costs beyond their control. Chris tried to explain the concept of responsibility accounting and the importance of analysis to better understand the merit of each program and the value that each contributed to the future growth of the university. Background Information Hidden Gem University was a small private school that had the flexibility and agility to add programs and change curriculum to meet the current demands for business professionals. Economic pressures were forcing the University to make tough decisions to focus on core programs and reduce costs to stay relevant in the changing landscape of higher education. The MBA program was added to the curriculum six years ago and struggled to get started with the heavy competition by the state university in the area. However, the ability to react quickly and provide resources to support students was now paying off and Hidden Gem was experiencing increased enrollment in the MBA program. The program had grown steadily and was very popular not only with traditional students, but also adults because it provided business acumen, leadership skills, and the credentials to achieve promotions and be competitive in the job market. The MBA program was especially popular with the faculty and staff at the University due to the tuition waiver program. The Employee Tuition Waiver Program Employees of Hidden Gem were able to take advantage of a tuition waiver program that allows faculty, staff, and their dependents to attend university classes at no charge. Prospective students go through the same process as everyone else for acceptance into the University and must abide by all other requirements as students at the University. However, they attended classes for credit with no tuition payment due, ever. The tuition waiver program is available for any degreed program at the University. With the downturn in the economy, the MBA program has become particularly enticing as a way to achieve a valuable degree at no cost, other than books. The Performance Report The finance committee had been working for weeks on preparing performance reports for each program in the University. They evaluated each line item and utilized activity-based costing to allocate overhead and common costs to the appropriate degreed programs. The performance report for the MBA program is provided in Exhibit A. Case Requirements 1. Prepare a revised performance report for the MBA program at Hidden Gem University taking into consideration the following: a. How does performance reporting differ for an overall organization report compared to a performance report considering responsibility accounting for a single unit within an organization (i.e. cost centers, profit centers, etc.)? b. What type of responsibility center is the MBA program for the Hidden Gem University (revenue center, cost center, profit center, or investment center)? c. Using responsibility accounting for decision making and control, evaluate which revenues and expenses should be included or excluded from the performance report for the MBA program at Hidden Gem University in Exhibit A. Specifically, consider how the employee tuition waivers should be handled. 2. Prepare a memo to Jamie, the financial committee chair, to send with your revised performance report. In the memo explain the overall concept of responsibility accounting and why you view it as a better measure of performance for the MBA program. Additionally, describe and provide support for the changes you made to incorporate responsibility accounting into the performance report for the MBA program. Exhibit A Hidden Gem University Performance Report for the MBA Program For the Year Ending May 31, 2021 Budget Actual Variance F Revenue Tuition & Fees Scholarships Employee Tuition Waivers Net Revenue F 3,118,345 -3,592 -1,437,856 1,676,897 3,745,982 -2,994 -2,053,940 1,689,048 627,637 598 616,084 12,151 U F U U U U U F Expenses Faculty - MBA program Adjunct Faculty - MBA program Administrative Staff - MBA program Employee Benefits - MBA program Other Personnel Cost Travel - MBA faculty Advertising MBA program Office Supplies Computer Lease Depreciation Cleaning/Maintenance Facilities/Insur/Prop Tax/Utilities Total Expenses 543,571 17,407 45,170 119,141 399,046 23,894 19,449 13,452 18,450 15,827 31,787 304,396 1,551,590 551,042 72,587 63,115 128,638 426,437 20,973 16,144 19,424 20,121 14,993 45,370 311,936 1,690,780 7,471 55,180 17,945 9,498 27,391 2,921 3,305 5,972 1,671 834 13,583 7,540 139,191 F U U F U U U Operating Income/Loss 125,307 -1,732 127,040 U Exhibit A (cont'd) Additional notes: 1. Tuition and Fees result from credit hours of students in the MBA program. 2. Scholarships are university scholarships granted to students in the MBA program. These amounts are unfunded and come from the operating budget of the program. All decisions regarding grant and distribution are made by the Dean of the program. Amounts less than budgeted indicate that students awarded scholarships withdrew from the program. 3. Tuition Waivers are employee benefits provided to University employees (and their family members). The reduction in revenue amounts are the tuition dollars generated by students in the MBA program who have an approved tuition waiver in place. "Wait a minute, did you just say that our MBA program is losing money? How can that be? Enrollment is up by 20% and we have not added any faculty positions." Chris, the Dean of the School of Business was just about speechless during the meeting with the University finance committee. The University was looking at each program and developing five-year projections. For the future financial health of the University, the finance committee was evaluating programs and planning to make recommendations to discontinue the unprofitable programs. Jamie, the finance committee chair, began the meeting by going over performance reports for each of the degreed programs offered in the most recent academic year. Jamie explained the allowances and adjustments as well as the allocation of common costs to each program. Chris immediately objected to the way the performance reports were calculated and the expectation that degreed programs were to be held accountable for costs beyond their control. Chris tried to explain the concept of responsibility accounting and the importance of analysis to better understand the merit of each program and the value that each contributed to the future growth of the university. Background Information Hidden Gem University was a small private school that had the flexibility and agility to add programs and change curriculum to meet the current demands for business professionals. Economic pressures were forcing the University to make tough decisions to focus on core programs and reduce costs to stay relevant in the changing landscape of higher education. The MBA program was added to the curriculum six years ago and struggled to get started with the heavy competition by the state university in the area. However, the ability to react quickly and provide resources to support students was now paying off and Hidden Gem was experiencing increased enrollment in the MBA program. The program had grown steadily and was very popular not only with traditional students, but also adults because it provided business acumen, leadership skills, and the credentials to achieve promotions and be competitive in the job market. The MBA program was especially popular with the faculty and staff at the University due to the tuition waiver program. The Employee Tuition Waiver Program Employees of Hidden Gem were able to take advantage of a tuition waiver program that allows faculty, staff, and their dependents to attend university classes at no charge. Prospective students go through the same process as everyone else for acceptance into the University and must abide by all other requirements as students at the University. However, they attended classes for credit with no tuition payment due, ever. The tuition waiver program is available for any degreed program at the University. With the downturn in the economy, the MBA program has become particularly enticing as a way to achieve a valuable degree at no cost, other than books. The Performance Report The finance committee had been working for weeks on preparing performance reports for each program in the University. They evaluated each line item and utilized activity-based costing to allocate overhead and common costs to the appropriate degreed programs. The performance report for the MBA program is provided in Exhibit A. Case Requirements 1. Prepare a revised performance report for the MBA program at Hidden Gem University taking into consideration the following: a. How does performance reporting differ for an overall organization report compared to a performance report considering responsibility accounting for a single unit within an organization (i.e. cost centers, profit centers, etc.)? b. What type of responsibility center is the MBA program for the Hidden Gem University (revenue center, cost center, profit center, or investment center)? c. Using responsibility accounting for decision making and control, evaluate which revenues and expenses should be included or excluded from the performance report for the MBA program at Hidden Gem University in Exhibit A. Specifically, consider how the employee tuition waivers should be handled. 2. Prepare a memo to Jamie, the financial committee chair, to send with your revised performance report. In the memo explain the overall concept of responsibility accounting and why you view it as a better measure of performance for the MBA program. Additionally, describe and provide support for the changes you made to incorporate responsibility accounting into the performance report for the MBA program. Exhibit A Hidden Gem University Performance Report for the MBA Program For the Year Ending May 31, 2021 Budget Actual Variance F Revenue Tuition & Fees Scholarships Employee Tuition Waivers Net Revenue F 3,118,345 -3,592 -1,437,856 1,676,897 3,745,982 -2,994 -2,053,940 1,689,048 627,637 598 616,084 12,151 U F U U U U U F Expenses Faculty - MBA program Adjunct Faculty - MBA program Administrative Staff - MBA program Employee Benefits - MBA program Other Personnel Cost Travel - MBA faculty Advertising MBA program Office Supplies Computer Lease Depreciation Cleaning/Maintenance Facilities/Insur/Prop Tax/Utilities Total Expenses 543,571 17,407 45,170 119,141 399,046 23,894 19,449 13,452 18,450 15,827 31,787 304,396 1,551,590 551,042 72,587 63,115 128,638 426,437 20,973 16,144 19,424 20,121 14,993 45,370 311,936 1,690,780 7,471 55,180 17,945 9,498 27,391 2,921 3,305 5,972 1,671 834 13,583 7,540 139,191 F U U F U U U Operating Income/Loss 125,307 -1,732 127,040 U Exhibit A (cont'd) Additional notes: 1. Tuition and Fees result from credit hours of students in the MBA program. 2. Scholarships are university scholarships granted to students in the MBA program. These amounts are unfunded and come from the operating budget of the program. All decisions regarding grant and distribution are made by the Dean of the program. Amounts less than budgeted indicate that students awarded scholarships withdrew from the program. 3. Tuition Waivers are employee benefits provided to University employees (and their family members). The reduction in revenue amounts are the tuition dollars generated by students in the MBA program who have an approved tuition waiver in place