University Day Care Center

Susan Brooks, Director of the University Daycare Center, was reviewing the year-to-date Budget
Performance Report from the Finance Department of the university. As she tried to analyze the
components of each report, she realized that something needed to be done about the Centers
financial status. The variance analysis for the Daycare Center showed a shortfall of over $89,000
(Exhibit 1).
BACKGROUND
University Daycare Center (UDC) was affiliated with a large urban university and maintained a
facility located two miles from the main campus. It had passed state inspection in April, and had
opened in July, just in time for the beginning of the fiscal year. The building in which the UDC was
located had formerly been an elementary school. The Center occupied one corridor, with four large
classrooms on each side. Two other corridor ls in the same building were unoccupied and had not
been renovated. At the the end of the hallway was the Directors office and a small reception area
where parents arrived with their children, usually by eight oclock in the morning.
The rooms had been carpeted and all of their doors had been removed to decrease the possibility
of injuries. Additionally, the walls had been remodeled so that glass panels occupied the upper half
of each wall on the corridor side. This made it possible for Teachers and Aides to observe children
directly from the hallway. Each room was supplied with furniture, supplies and toys appropriate to
different age groups of children. The infant room, for example, had cribs and bassinets and was
stocked with various sizes of disposable diapers. The facility was cleaned and maintained,
respectively, by the housekeeping and maintenance departments of the university.
In December of the previous year, the universitys Department of Human Resources had
surveyed 300 of the 1250 university employees, including professors, administrative personnel,
laboratory workers, and office assistants, to determine if they would utilize a daycare center. The
survey included questions about fees, hours of operation and coverage for emergencies. The
response was overwhelmingly in favor of providing such a service. The Human Resources Director,
therefore, had drafted a proposal for the following years budget and received approval for a one-
year $160,000 subsidy for the operation of a daycare center. Funds for the remodeling and
furnishing of the Center were to be obtained from the Capital Improvement fund and the building
was to be rented at a cost of $60,000 a year, with a one year renewable lease.
The Human Resources department began promoting the Center Two months prior to its
opening. Flyers were posted throughout the university and were placed in the mailboxes of virtually
every permanent employee. A Human Resources representative attended orientation sessions for
new employees and answered questions regarding the Centers services. The promotion approach
emphasized the presence of the Center as an employee benefit, despite the fact that employees
would pay for most of the operating expenses in the form of tuition fees. No fees were printed on
the promotional literature, and all tuition discussions between potential enrollees and the UDC
Director were to be held confidential.
The proposal stated that the Center intended to provide daycare at reasonable rates (based on
parental income) for any permanent university employee. A sliding fee scale would guarantee
access for employees of all income levels. The Human Resources department hoped that the UDC
would become a permanent service and envisioned that its implementation and operation would
become a model for other university-affiliated daycare centers. Additionally, its presence could be
an attractive incentive for employees to stay with the university or to choose employment there in
the first place.
FEES AND ENROLLEES
After considerable market research and consideration of various fee structures, a sliding fee scale
had been developed. It incorporated not only income measures, but also intensity of care. Thus, the
tuition charged for infants was generally higher, since they required closer supervision (Exhibit 2).
The UDC was licensed to have seven spaces for infants (two to eighteen months old) eighteen
spaces for toddlers (eighteen months to two years old) and seventeen for preschoolers (two to five
years old). In October, the enrolled population consisted of four infants, ten toddlers and nine
preschoolers (Exhibit 3). Some of the children did not attend every day because their parents were
part-time employees or had other child care arrangements for the remaining days of the week. All
parents were required to submit documentation of immunizations, as well as a physician statement
attesting to the health of each child.
STAFFING
The original budget allowed for staffing consisting of the director, three instructors, six teachers,
five aides, and a half-time clerical worker. The Center was not fully staffed in some of these
categories, but, since the staffing budget had assumed full enrollment, some positions were in fact
overstaffed (Exhibit 4). In anticipation of high demand for the service, Ms. Brooks had hired all of
the instructors and teachers one month before the Centers opening, both to accommodate an
immediate full enrollment, as well as to comply with state requirements concerning child-to-teacher
ratios. All instructors and teachers were certified in child care. Aides were trained and supervised by
the instructors.
BUDGETING PROBLEMS
The Universitys $160,000 subsidy was to be used to finance the deficit at full enrollment; that
is, at full enrollment, tuition fees were expected to contribute a total of $329,194 and expenses were
expected to total $489,194. Since expenses had not fallen proportionately to revenue, the University
was facing a subsidy of $249,326 (Exhibit 1).
Ms. Brooks believed the Center should remain an integral part of the university community.
However, she also recognized the importance of its financial viability. She knew that if she did not
make some adjustments in expenses, revenues, or both, these decisions would be made by someone
from the department of Human Resources. This would reflect poorly on her ability to manage the
budget and might also make the Center a target for elimination if budget cuts became necessary.
As she reviewed the set of reports generated by the Finance Department, a number of items
remained unclear as to what impact they would have on the continuing operation of the center. For
example, adjustments made for the actual enrollment showed a variance of almost $65,000 for staff
positions alone (Exhibit 4).
Supplies expenses, by contrast, included many start-up items. Some of these were relatively
long-lasting objects, such as toys and linens. Others, including disposable diapers and snack foods,
were consumables. Many of the invoices for various classroom items had not yet been received.
Additionally, charges for various services provided by the University, such as maintenance and
laundry, were only generated every two to three months. Since this was the Centers first year of
operation, however, the clerk had been instructed to carefully record the nature and the amount of
each purchase, so that a better estimate could be submitted for the following years budge t. As a
result, Ms. Brooks believed that the expenses shown in Exhibit 1 accurately reflected the results of
the Centers activities.
As of November, the UDC had increased its enrollment to over 50% of capacity in each
category. Still, total revenues from all contributions were far below what had been projected
(Exhibit 3). Ms. Brooks knew that part of this was due to the empty slots as well as the partial
attendance by some children; however, even if adjustments were made for full enrollment by the end
of the year, there would still be a revenue shortfall of approximately $67,000, assuming that average
tuition in each category remained unchanged (Exhibit 5). It was clear that revenue could probably
be increased if enrollment were limited to those in the highest-paying scales. One of the goals of
the UDC, however, was to provide access to all employees, and charging the maximum tuition for
the remaining slots would effectively limit the service to high-income applicants. Also, since the
Center was not at full capacity upon opening, Ms. Brooks had seen no reason to exclude part-time
attendance by some children. She had assumed that the revenue provided by part-time enrollees
would offset at least some of the losses from the empty slots.
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University Day Care Center June 2012 2 of 6
DECISIONS
Complicating all of these considerations was the fact that even though future revenues and
expenses were uncertain, both could be substantially manipulated. For example, decisions
concerning the the hiring or firing of staff could have a large impact on salary expenditures. Ms.
Brooks was reluctant to make these decisions too quickly. If teachers were laid off and then
enrollment suddenly increased, she would have to rehire them in order to maintain the required
child to teacher ratios.
By contrast, discretion in the use of supplies was limited, but she wondered if it might be
worthwhile to investigate different vendors for expensive items like disposable diapers.
With only four month s of operation as a basis for making predictions, Ms. Brooks was
uncertain as to how soon, if ever, the Center would be at full capacity. She also did not know what
type of enrollee mix would best fit the mission of the Center and at the same time, generate enough
revenue to ensure its survival. The sliding fee scale might be flawed, but the universitys Budget
Department was reluctant to do any more research on this item. They maintained that daycare
centers throughout the city had comparable fee schedules. Ms. Brooks doubted that she could
duplicate the efforts of the research by herself and therefore decided to accept the fee scale, and
perhaps make minor adjustments for individual applicants.
Whether to encourage the presence of more part-time enrollees presented another dilemma. The
child-to-teacher ratio on any given day could be compromised by the presence of too many part-
time children attending on the same days. The Center might be overstaffed on other days due to
such uneven attendance. This not only created problems in the scheduling and hiring of staff, but
also meant that the partial slots occupied by part-time enrollees could no longer be used by
potential full-time enrollees. Ms. Brooks had wanted to make the service available to all employees,
but wondered if she should limit attendance to full-time children. On the other hand, if additional
full-time applicants never materialized, then part-time attendees were needed, even if they did create
staffing problems.
Although much of the promotional effort was ongoing, Ms. Brooks was unclear as to whether
there were better ways of advertising the service to employees. The option of promoting to potential
applicants outside the university community had occurred to her, although she doubted if the
universitys Trustees would approve of funding for this. In addition to questions of how to increase
enrollment, she wondered if the Center should instead opt to simply maintain the present enrollment
or even to decrease it (by attrition). This would make the task of laying off teachers easier, since
fewer children would provide a suitable justification for terminating the Teachers employment. If
the center could run at less than full capacity, but not run a deficit, then she might be in a better
position to bargain for a larger subsidy in next years budget proposal.
She also questioned the $160,000 subsidy amount. Was this just a token gesture to demonstrate
to the community how progressive the university was, but one without real support from those who
controlled the budget? The amount had seemed generous at first, but clearly there were problems in
complying with the revenue and expenditure targets on which the subsidy was based. e
Although Ms. Brooks did not expect the university to subsidize any shortfalls in enrollment
completely, she realized that she would need to make a convincing argument for the continued
operation of the Center. Unless she could do this by the time budget negotiations began in
February, the closure of the UDC would no doubt become a subject for discussion at the annual
Trustees Meeting in March.

Assignment
1. What is the source of the financial problems at the UDC? Please be as specific as you can,
explaining all the reasons why actual results differ from budgeted ones.
2. What might Ms. Brooks do to correct the financial problems? Please be as specific as you
can in outlining a course of action that you believe she should follow.
3. What action would you recommend the Trustees take at their March meeting?

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University Day Care Center June 2012 3 of 6
 EXHIBIT1. UNIVERSITY DAY CARE CENTER
VARIANCES FROM BUDGET BASED ON ACTUAL ENROLLMENT
AND ESTIMATED ANNUALIZED EXPENSES

Budget Actual Variance

REVENUES
Enrollee tuition $329,194 $141,926 ($187,268)
EXPENSES
Salaries: FTES* FTES*
budget actual
Director 1 1 $32,000 $31,990 $10
Instructors 3 3 66,000 66,500 (500)
Teachers 6 6 120,000 114,108 5,892
Aides 5 1.5 83,200 27,140 56,060
Clerical 0.5 0.5 9,000 9,000 0
Subtotals 15.5 12 $310,200 $248,738 $61,462

Fringe benets 68,244 54,722 13,522

Supplies:
Training 4,000 2,190 1,810
Conference 1,650 904 746
Food 16,000 8,762 7,238
Disposables 4,200 2,300 1,900
Classroom supplies 4,800 2,629 2,171
Supplies subtotal 30,650 16,785 13,865
Other expenses:
Field trips 1,100 602 498
Equipment 1,000 548 452
Laundry 500 274 226
Contingency 4,000 2,190 1,810
Maintenance 13,000 7,119 5,881
Telephone 500 274 226
Rent 60,000 60,000 0
Other expense subtotal $80,100 $71,007 $9,093

TOTAL EXPENSES $489,194 $391,252 $97,942

TOTAL REVENUES LESS EXPENSES ($160,000) ($249,326) ($89,326)

PLUS BUDGETED DEFICIT $160,000 $160,000
VARIANCE FROM BUDGETED DEFICIT ($89,326)

* Full-time equivalents
 UNIVERSITY DAY CARE CENTER
Exhibit 2. Sliding Fee Range
Total Annual Tuition
Annual Family Income Range Infant Toddler Pre-school
$ 0 - 19,999 $5,980 $4,680 $3,900
20,000 - 24,999 6,644 5,200 4,333
25,000 - 29,999 7,309 5,720 4,767
30,000 - 34,999 7,973 6,240 5,200
35,000 - 39,999 8,638 6,760 5,633
40,000 - 44,999 9,302 7,280 6,067
45,000 - 49,999 9,967 7,800 6,500
50,000 - 59,999 10,631 8,320 6,933
60,000 - 69,999 11,296 8,840 7,367
70,000 - Above 11,960 9,360 7,800

Exhibit 3. Individual Tuition Contributions (Revenues) based on Present Enrollment

Infants Toddlers Preschoolers TOTALS

Number of full-time slots 7 18 17 42

Tuition payments $11,296 $4,680 $3,900

11,960 8,320 3,900
3,588 * 7,800 4,767
10,631 7,800 7,367
8,320 3,120 *
5,720 6,500
5,720 5,633
4,680 2,340 *
3,744 * 2,340 *
7,800
Revenue subtotals $37,475 $64,584 $39,867 $141,926
Budgeted revenue $73,694 $156,048 $99,452 $329,194
Variance from budgeted revenue ($187,268)
Average tuition per enrollee $9,369 $6,458 $4,430
Budgeted average tuition per enrollee $10,528 $8,669 $5,850
* Part-time enrollees
 For the exclusive use of I. Amar, 2016.

UNIVERSITY DAY CARE CENTER

Exhibit 4. Salary Variances Based on Actual Enrollment
(A) Budgeted
Budgeted FTEs Budgeted salaries
Budgeted FTEs needed for salaries adjusted for
Salary at full current at full current
Category capacity enrollment* capacity enrollment Variances

Director 1.0 1.0 $32,000 $32,000 $0

Instructors 3.0 1.5 66,000 33,000 33,000
Teachers 6.0 3.0 120,000 60,000 60,000
Aides 5.0 3.0 83,200 49,920 33,280
Clerical 0.5 0.5 9,000 9,000 0
Totals 15.5 9.0 $310,200 $183,920 $126,280
(B)
Budgeted
Budgeted FTEs salaries
needed for adjusted for
current current Actual
enrollment* Actual FTEs enrollment salaries Variance

Director 1.0 1.0 $32,000 $31,990 $10

Instructors 1.5 3.0 33,000 66,500 (33,500)
Teachers 3.0 6.0 60,000 114,108 (54,108)
Aides 3.0 1.5 49,920 27,140 22,780
Clerical 0.5 0.5 9,000 9,000 0
Totals 9.0 12.0 $183,920 $248,738 ($64,818)

* Budgeted positions have been adjusted here to account for the current stafng needs of the Center.
Amounts are budgeted to nearest half FTE (full-time equivalent) except Director.

Exhibit 5. Annual Individual Tuition Contributions (Revenue) Based on Full Enrollment

Infants Toddlers Preschoolers TOTALS

Number of full-time slots 7 18 17 42

Tuition payments $11,296 $4,680 $3,900

11,960 8,320 3,900
3,588 * 7,800 4,767
10,631 7,800 7,367
9,369 # 8,320 3,120 *
9,369 # 5,720 6,500
9,369 # 5,720 5,633
4,680 2,340 *
3,744 * 2,340 *
7,800 4,430 #
6,458 # 4,430 #
6,458 # 4,430 #
6,458 # 4,430 #
6,458 # 4,430 #
6,458 # 4,430 #
6,458 # 4,430 #
6,458 # 4,430 #
6,458 # 4,430 #
Revenue subtotals $65,582 $116,248 $79,737 $261,567
Budgeted revenues $73,694 $156,048 $99,452 $329,194
Variance from budgeted revenue ($67,627)

* Part-time enrollees
# Assume future enrollees pay the current average tuition and attend full-time