Collecting information on performance and exercising control:
In today’s business environment accounting is a very useful tool in the control process. This all because it is likely to assert plans in accounting terminology(budgets) and it also likely to assert real outcomes in the same terminology which makes it easier to compare between real and planned outcomes. Where real outcomes are at difference with budgets, this difference should be underlined by accounting information. Authorities can take necessary measures to bring their business on the way towards the attainment of the budgets. In this regard they need to:
Source: Mclaney, E.J. Accounting:an introduction/Eddie McLaney & Peter Atrill—2nd ed, Prentice Hall
The Budget Setting Process:
This is such a crucial part for running an enterprise or business successfully and for other companies that have a tendency to approach in a quite methodical and formal way. This generally comprise of number of steps which needs to be consider while formulating a budget.
- Establish who will take responsibility:
One of the key aspects of the process is to develop coordination between budgets so that the plans of one department match and are complementary to those of other departments through compromising where modification is going on of initial budgets must be commence. This implies that someone from the top management (Concerned departmental head with the capabilities to use financial tools appropriately) has to engage directly coz generally people working on this level have the capabilities to take initiative in an appropriate manner, have a high moral and if required formal managerial authority to force departmental managers to concede.
- Communicate budget guidelines to relevant managers:
Basically the purpose of budget is to anticipate short-term plans that lead to the achievement of long-term plans and in general the goal of the business. Therefore it is necessary that while budgeting the concerned managers are fully aware of what would be the long-term objectives and how the forthcoming budget tenure is intended to work towards them. They also need to be well informed about commercial and economic environment in which they will work.
- Identify the key or limiting factor:
There will always be some aspects of the business that will stop it achieving its goal to the utmost extent. This is often a limited ability of the business to sell its products; sometimes, it is some production shortage (labor, materials or plant) that is basically a limiting factor or linked to these, a shortage of funds. Therefore it is necessary that the limiting factor is identified.
- Review and coordinate budgets:
It is the responsibility of the concerned authorities at this particular stage to give a thorough review the various budgets and satisfy itself that the budgets praise one another. Where there is a slight lack of coordination, corrective measures must be taken to make sure that the budgets mesh.
- Communicate the budgets to all interested parties:
The formal approved budgets are now forward to the individual managers where they are responsible to implement. This is in effect, the expectations of the senior management from other managers who are formally communicated about the desired objectives.
- Monitor performance relative to the budget:
Most of the time activity of budget setting will have been useless unless each manager’s actual performance is evaluate with his/her intended performance, which is personified in the budget.
Source: Mclaney, E.J. Accounting:an introduction/Eddie McLaney & Peter Atrill—3rd ed, Prentice Hall
Part (B)
The concerned authorities of Victoria hospital while designing a budget had ignored one major point of concern and that is they need to understand that when they are going to put their budgets into practice, it is more likely that their budgeted figures will not be the same as the actual figures that they acquire. This may be because of errors in their calculation, due to changes in plan, or purely down to external factors out of their control.
When following the budget it is necessary that they keep it their control at all times, therefore these variances are not to be ignored but acted upon right away, doesn’t matter even if they are favorable. These variances can be calculated in a simple manner:
If the actual figure is more favorable than the budgeted figure, it is often reported stating the letters FAV (favorable). Likewise, if the actual figure is worse than the budgeted figure, it is reported stating the letters ADV (adverse).
For Example:
It is necessary to understand by the concerned authorities of Victoria hospital, variances that doesn’t affect to cash flow can be over looked. It can be expected some amount of variances in most figures but variances that are noteworthy, which can affect to cash flow, the concerned authorities should start investigate straight away. It may be too late to recoup the difference but for the future it can be helpful to be proactive. In case of favorable variance the concerned authorities should investigate why this has occurred. Is there any way or something they can do to make these figures even more favorable.
The budgeting authorities have to keep in mind that income figures will be favorable if actual figure is higher than the budgeted figure; similarly expenditures figures are more favorable if actual figure is lower than the budgeted figure.
Therefore hospital budgeting authorities have to realize that don’t leave the budget at one side once it has been written, it will need to be carefully stick to it and uphold. Any issue necessitates to be acted upon as early as possible, whether it is favorable or adverse.
Victoria Hospital-Laundry Department
Report for quarter ended 30 September 2000
Flexible Budget Variance
Table (1)
The budget of Victoria hospital laundry department simulates a single level of hospital activity for a budgeting period and the entire budget is built around that level. In this traditional approach the budget maker use one set of volume bulge to estimate the cost and other account heads. However cost approximate that result from fixed budgeting is as good as the volume projections in statistical manner which they consider as a base. Areas where there is not such chances of volume fluctuation at a high level for instance five or ten percent over the past few years, this kind of approach can be a perfect one for the hospital but not in every circumstance there can also be a possibility of increase variances between actual and budgeted data due to certain variations in departmental volume.
As I see the reason for doing this form of budgeting by the hospital is it doesn’t require any form of financial expertise and it can easily be done in a short span of time as compare to flexible budget. In hospitals a number of activities are obvious, authorize or required, the authorities don’t like to invest time developing volume and cost relationship. However there is also one major concern and that is it is quite difficult to make amendments in this kind of budgeting for instance in changing patient volume and this results in increase chances for considerable variances which are high and when using unchanging projection of cost and volume.
Wages Variances:
Wages variances results due to the difference between the actual wages of the employees and flexed wages of the employees. The above mention table clearly illustrate that wage variances are unfavorable. There is a clear difference between what exactly was estimated and what was been paid by the hospital authorities. It is the responsibility of the concerned authorities to ensure an efficient and effective utilization of labor resource.
Overtime variances:
With reference to table 1 there is a negative mark in overtime premium which is a sign of adverse overtime which occurs due to lack of planning and inefficient use of manpower resource by the concerned authorities.
Detergent and other supplies:
The figure of detergent and other supplies in table 1 shows an adverse variance which is a clear indication of exceed amount of usage and wastage of material has taken place.
Water, water softening and heating:
A positive figure which is an implication of favorable variance that implies a development of strategy to how to utilize this resource in a well managed technical way.
Maintenance:
Due to increase in the weight processed in the cost of maintenance goes up which is a clear indication of adverse variance.
A number of hospitals prefer to start the fiscal year with a fixed budget but it doesn’t mean that concept of flexible budget is ignored many also employ a mechanism of flexible budget which helps them to keep and eye and to counteract revolution in the health care industry.
A flexible budget assumes that there are a number of hospital activity levels within the budgeting period and the purpose of modifying regular budget is to mirror those fluctuations. This form of budget (Flexible Budget) specifies those revenues which are expected and those forms of expenses which are associated with a number of different levels of patient volume and utilization. With a help of flexible budget the authority can easily forecast their long-term goals, operational needs and allusion of revenue which are based on these intensity of volume which results in the development of dynamic and continuing budget management process and can be useful by the concerned department managers etc. One of the advantage is it takes department volume changes into account and analysis on monthly basis provide a mechanism of immediate feedback on those information which seems to be important to the management and through a mechanism of immediate feedback on these fluctuations let them adapt quickly and make necessary changes in organizational and departmental policy. It seems to be necessary to understand how intently this form of budget (Flexible budget) pursues real experiences; on the other hand there can be an extensive amount of variances in between fixed budget and the real activity of the hospital.
Part (C)
Conclusion:
The hospital authorities need to formulate a budget which is based on their strategic plan. As I understand hospital budget should be based on a five year strategic plan to understand its capital needs and gain buy-in and managerial support for the budget targets. The strategic plan should be integrated into a financial plan that calculates cash, debt, capital and profitability requirements to fund routine and five year strategic plans and maintain financial integrity. The hospital budget should be based on the mission strategy, and financial plan of the entire health system.
- It’s quite helpful and can be beneficial to use comparative benchmark on annual basis. Cost such as external and benchmarking of their productivity should be performed annually which will help them to situate productivity standards and appropriate cost per unit of service. It is therefore highly recommended to use benchmarking once a year to diagnose possible opportunities for cost saving to identify vicinity to fill the budget gap.
- The concerned authorities should have a sense of ownership to design and develop accurate and high-performance department budgets.
- To achieve a desired output it is essential to have a culture of accountability. Senior management should have a firm resolve about reaching the budget target they establish. It is therefore necessary in budget meetings or while designing a budget, the presence of department manager and concerned director who meets with a budget team can be based on, the CFO, budget director and controller to encourage senior leadership accountability into the process.
- Exercise flex budgets. Therefore while making a department budget make sure it is flexible and interlink with the hospital’s master budget and try to incorporate volume-adjusted staffing grids that are based on productivity standards and per unit of service cost. This form of budget gives an opportunity to modify expected financial performance to imitate the effect of its operations of volume at different levels.
- Monitoring of variances and entail corrective action plan. It is vital to monitor volume-adjusted variances on monthly basis and easily available to other concerned department managers and directors for rake. Explanations of variance should be required monthly and corrective action plans should be required with in the one week of variance reports. To intensify accountability, concerned department directors and concerned managers need to develop and present plan of actions with specific timelines and task to senior leadership at meetings.
- It is important that the concerned authorities should identify their objectives so that they can coordinate the budget to help achieve them.
As we all know that the health care industry operates in a structured, professional, noble and in a dynamic environment rather than a constant one, monitoring in changes on volume and the consequential effects is imperative to good budget management.
