Question

As I read the assigned Discussion 1 Question, “How do higher education leaders decide which proposed revenues and expenditures to approve and which to reject?”, my initial response is that the decision is arbitrary and with a small factor of who has the decision makers ear. Maybe the question should start with “How should…”.

            The basic fundamental principle of accounting is applicable here:

Assets = Liabilities + Capital

What do we own, what do we owe and what do we have invested in us as an entity? Budgeting looks into each of these topics and specifically looks at, primarily, Revenues (money coming in) and Expenses (money going out.) Many formulas are discussed and ratios explained in the initial chapters of our textbook.

            In reality, decisions have to be made regarding the funding of any university. The individuals making the decisions are ultimately responsible. Every university has Fixed Costs (Expenses that are pretty standard year after year such as IT and Educational Platform Costs, Salaries, Costs associated with physical buildings, etc.) and Variable costs (Expenses that change yearly such as purchasing of certain types of equipment, hourly employee pay, etc.) Certain expenditures, such as costs associated with the construction of a new building, may fit into a separate category, but would still factor into any budgetary plan.

            Certain expenses are going to be pretty standard and won’t change much from year to year. Smaller budgetary amounts will filter down to different department directors or managers. These will fit into needs and wants. Decisions regarding these may truly be more arbitrary than others.

Answer 1

This is a correct understanding of the question in hand. It is true that various proposals for revenue and expenditures are analysed based on the source of revenues, their sensitivities to externalities etc. Similarly expenditures are forecasted based on fixed expenses which are expected to continue and the variable part which is expected to increase or decrease with revenue.

Finally the decision to include a proposal or discard is taken basis the returns that the proposal is expected to give and how much the decision maker is convinced about the efficacy of the proposal given that there are competing proposals for the same amount of capital. Thus the final decision has a certain degree of arbitrariness embedded in the whole process