Part VI: Construct And Evaluate Budgets Using Chapter 15 ✓ Solved

Part VI: Construct and Evaluate Budgets. Using Chapter 15 on

Part VI: Construct and Evaluate Budgets. Using Chapter 15 on Operating Budgets and related material from Chapters 13 and 14, construct and evaluate a 12-month operating budget for a healthcare department or small hospital. Your paper should: 1) Define budget types, responsibility centers, identifiable vs allocated costs, and fixed vs variable costs. 2) Describe the budget construction process, assumptions, computations, and information sources. 3) Prepare a sample operating budget (12-month) with revenue and expense line items, show static and flexible budget approaches, and include a variance analysis comparing actual, budgeted, and static budgets. 4) Discuss budget review, forecasting methods (revenue, staffing, operating expenses), capacity considerations, and best practices for monitoring and revising budgets. 5) Provide recommendations for improving budget accuracy and control. Use relevant examples, include assumptions, and cite sources.

Paper For Above Instructions

Introduction

Effective operating budgets translate organizational objectives into financial targets, support control, and create cost awareness (Baker & Baker, 2018). This paper constructs and evaluates a 12‑month operating budget for a hypothetical 50‑bed community hospital department (e.g., general medicine unit). It defines budget types and responsibility centers, explains identifiable versus allocated and fixed versus variable costs, presents a sample operating budget with static and flexible approaches, performs a variance analysis, and recommends best practices for forecasting, review, and control.

Budget Types and Responsibility Centers

Operating budgets cover short‑term revenues and expenses, typically a 12‑month period; capital budgets handle long‑lived assets and multi‑year planning (Baker & Baker, 2018; Gapenski, 2012). Responsibility centers include cost centers (managers control costs), revenue centers, and profit centers (both costs and revenues) — each shaping budget accountability and performance metrics (Horngren et al., 2015).

Identifiable vs Allocated Costs; Fixed vs Variable Costs

Identifiable (direct) costs are traceable to the department (salaries for unit staff, supply costs for patient care). Allocated costs (indirect) include general administration, facility overhead, and shared services (Gapenski, 2012). Variable costs change with activity (medication, supplies per patient day); fixed costs remain stable across a range (depreciation, building lease) (Horngren et al., 2015). Distinguishing these is essential when constructing flexible budgets and performing variance analysis.

Budget Construction Process, Assumptions, and Data Sources

Construction phases: planning the format and scope; gathering historical data and forecasts; preparing inputs (staffing plans, capacity checks); building draft budgets; reviewing and revising; and final submission (Baker & Baker, 2018). Key assumptions must be documented and replicable: expected volume (patient days, admissions), payer mix, utilization rates, wage inflation, and contractual allowances. Primary data sources include historical financials, electronic medical records (EMR) utilization reports, staffing rosters, payer contracts, and industry trend reports (AHA, CMS) (Ginter et al., 2018; CMS, 2021).

Sample 12‑Month Operating Budget (Summary)

Assumptions: 3,650 patient days/year (10 average daily census), average revenue per patient day $1,200 before contractual allowances, payer mix yielding net revenue per day $900, variable cost per patient day $450, fixed annual departmental costs $500,000, labor as 60% of total expenses, wage inflation 3%.

Notes: Budgeted net revenue = 3,650 days × $900 = $3,285,000. Variable expenses = 3,650 × $450 = $1,641,750. Static budget equals budget values fixed at anticipated volume. Actual indicates operations realized slightly lower volume or reimbursement (hence lower revenue) and modestly lower variable costs.

Static vs Flexible Budgets and Variance Analysis

Static budgets do not respond to volume change and are useful for planning; flexible budgets adjust to actual activity and isolate efficiency and price variances (Baker & Baker, 2018; Horngren et al., 2015). Variance analysis example: revenue variance (Actual vs Budget) = -$135,000 (adverse), largely due to lower volume or payer mix changes. Variable cost variance = Favorable $101,250 (actual lower), implying improved per‑day efficiency. Fixed cost variance = Adverse $20,000 (higher overhead or unexpected repairs). Overall operating margin variance = -$53,750 adverse. Analysis should separate volume-driven variances (compare static to flexible) from efficiency/price variances (compare flexible to actual) (Gapenski, 2012).

Forecasting and Capacity Considerations

Forecasting integrates utilization, payer trends, staffing needs, and inflation. Short‑range forecasts (next year) require level‑1 and level‑2 inputs (clinical staff and statistical data) and executive judgment for strategic shifts (Ginter et al., 2018). Staffing forecasts should produce a master staffing plan with hours and floating coverage; compute annual staffing factors and contingency for absenteeism. Capacity constraints (space, equipment, labor market) limit attainable volumes; scenario planning helps assess remodeling or surge conditions (WHO, 2019).

Budget Review, Monitoring, and Best Practices

Effective review requires understanding report format, annualizing partial‑year items, and reconciling allocations. Monthly variance reporting, timely reconciliation of contractual allowances, and rolling forecasts improve responsiveness (Kaplan & Porter, 2011). Use standardized metrics (cost per patient day, labor cost per adjusted patient day) for comparability across units and peers (AHA, 2020). Implementing EMR analytics and automated dashboards enables near real‑time monitoring and supports flexible budget adjustments (Horngren et al., 2015).

Recommendations

• Document assumptions clearly and update them quarterly; maintain sensitivity analyses for key drivers (volume, payer mix, wage inflation) (Baker & Baker, 2018).
• Adopt a flexible budgeting approach for departments with variable volume; use static budgets for fixed strategic commitments (Gapenski, 2012).
• Strengthen data verification and consistency across reporting periods to enable valid comparisons and benchmarking (Ginter et al., 2018).
• Invest in forecasting tools and staff training to improve staffing forecasts and to model capacity constraints and scenario outcomes (Kaplan & Porter, 2011).
• Regularly review allocations for overhead and seek transparency to improve accountability at responsibility center level (Horngren et al., 2015).

Conclusion

Constructing and evaluating operating budgets is a disciplined process that relies on clear definitions, documented assumptions, reliable data, and iterative review. Combining static planning with flexible, activity‑based adjustments and robust variance analysis enables managers to align resources with objectives, control costs, and respond to changing operating conditions (Baker & Baker, 2018; Gapenski, 2012).

References

• Baker, J. J., & Baker, R. W. (2018). Health Care Finance: Basic Tools for Nonfinancial Managers (6th ed.). Jones & Bartlett Learning. (Baker & Baker, 2018)
• Gapenski, L. C. (2012). Healthcare Finance: An Introduction to Accounting and Financial Management (6th ed.). Health Administration Press. (Gapenski, 2012)
• Horngren, C. T., Datar, S. M., & Rajan, M. V. (2015). Cost Accounting: A Managerial Emphasis (15th ed.). Pearson. (Horngren et al., 2015)
• Kaplan, R. S., & Porter, M. E. (2011). How to solve the cost crisis in health care. Harvard Business Review, 89(9), 46–52. (Kaplan & Porter, 2011)
• American Hospital Association. (2020). TrendWatch Chartbook 2020. AHA. (AHA, 2020)
• Centers for Medicare & Medicaid Services. (2021). National Health Expenditure Data. CMS. (CMS, 2021)
• Ginter, P. M., Duncan, W. J., & Swayne, L. E. (2018). Strategic Management of Health Care Organizations (8th ed.). Jossey‑Bass. (Ginter et al., 2018)
• Kovner, A. R., & D'Aunno, T. (2018). Contemporary Health Care Management (5th ed.). F.A. Davis. (Kovner & D'Aunno, 2018)
• World Health Organization. (2019). Global Health Expenditure Database. WHO. (WHO, 2019)
• Dranove, D., & Satterthwaite, M. A. (2000). The industrial organization of health care markets. In A. J. Culyer & J. P. Newhouse (Eds.), Handbook of Health Economics (Vol. 1, pp. 1093–1139). Elsevier. (Dranove & Satterthwaite, 2000)