Question 81 From Page 278 Chapter 8 Why Are Planning And Bud

Question81 From Page 278 Chapter 8 Why Are Planning And Budgeting

Question 8.1 from page 278, Chapter 8: - Why are planning and budgeting so important to an organization’s success? Question 8.2 from page 278, Chapter 8: - Briefly describe the planning process. Be sure to include summaries of the strategic, operating, and financial plans. Question 8.3 from page 278, Chapter 8: -Describe the components of a financial plan. Problem 8.1 from page 279, Chapter 8; SEE HELPFUL HINTS BELOW: - Consider the following 2011 data for Newark General Hospital (in millions of dollars): Static Budget Flexible Budget Actual Results Revenues $4.7 $4.8 $4.5 Costs 4.2 Profits 0.3 a. Calculate and interpret the profit variance. Profit variance = Actual profit - Static profit. Answer? Interpret your Profit Variance results? b. Calculate and interpret the revenue variance. Revenue Variance = [Actual Revenues – Static Revenues]. Answer? Interpret your Revenue Variance results? c. Calculate and interpret the cost variance. Cost Variance = [Static Cost – Actual Cost]. Answer? Interpret your Cost Variance results? What is the net effect of the revenue and cost variance? Hint: Take the revenue +cost variance= profit variance. d. Calculate and interpret the volume and price variances on the revenue side. -Volume variance = Flexible Revenues - Static Revenues. Volume variance =? Interpret your Volume Variance results? -Price variance = Actual revenues - Flexible revenues. Price Variance =? Interpret your Price Variance results? e. Calculate and interpret the volume and management variances on the cost side. -Volume variance (on cost side) = Static costs - Flexible costs. Volume Variance (on cost side) =? Interpret your Volume Variance results? -Management variance = Flexible costs - Actual costs. Management Variance =? Interpret your Management Variance results? f. How are the variances calculated above related?

Paper For Above instruction

Effective planning and budgeting are fundamental to the success of any organization as they facilitate strategic direction, operational efficiency, and financial stability. These processes serve as essential tools for management to set objectives, allocate resources efficiently, and monitor performance against targets. Their importance is particularly pronounced in complex sectors such as healthcare, where precise resource management can significantly impact patient outcomes and financial viability.

The planning process within an organization comprises several core components: strategic planning, operational planning, and financial planning. Strategic planning involves defining the organization's long-term vision, mission, and overarching goals. It lays the foundation for decision-making and guides the development of tactical and operational plans aligned with overall objectives (Bryson, 2018). Operational planning translates strategic goals into specific actions and workflows, detailing day-to-day activities, resource allocations, and performance benchmarks necessary to achieve the broader mission (Harrison & Katsioloudes, 2017). Financial planning, on the other hand, involves preparing budgets, forecasts, and financial statements to ensure that the organization has the necessary financial resources to support its operational and strategic initiatives (Shim & Siegel, 2020).

A comprehensive financial plan integrates various components such as revenue projections, expense estimations, capital investments, and financial risk assessments. Revenue forecasts are based on historical data, market trends, and expected growth rates, while expense estimations consider fixed and variable costs, operational efficiencies, and contingency reserves. Capital investment plans outline future expenditures for equipment, facilities, or technology upgrades. Financial risk management involves identifying potential financial uncertainties and developing mitigation strategies, ensuring the organization remains solvent and financially resilient (Brigham & Ehrhardt, 2016). Importantly, these components must align with strategic goals, fostering informed decision-making and sustainable growth.

Analyzing Variances: Newark General Hospital Case Study

Using the 2011 data for Newark General Hospital, the analysis of variances provides insights into the organization's financial performance relative to its budgets. The static budget represents initial expected revenue and costs, while the flexible budget adjusts these figures based on actual activity levels. The actual results reflect realized performance, enabling the calculation of various variances that highlight areas of efficiency or concern.

Profit Variance:

Profit variance = Actual profit - Static profit.

Given that profit is calculated as revenues minus costs, we first determine actual and static profits. Assuming static revenue of $4.7 million and static costs of $4.2 million, the static profit is $0.5 million. Actual profit is $0.3 million (from actual revenue $4.5 million minus actual costs). Therefore, profit variance = $0.3 million - $0.5 million = -$0.2 million. This negative variance indicates the hospital earned less profit than initially planned, possibly due to lower revenue or higher costs than anticipated. It reflects operational challenges or unplanned expenses that impacted profitability.

Revenue Variance:

Revenue variance = Actual revenues - Static revenues = $4.5 million - $4.7 million = -$0.2 million. This indicates revenues fell short of expectations, potentially due to lower patient volumes or decreased service utilization. This shortfall adversely impacted profitability, emphasizing the need to analyze underlying causes for revenue decline.

Cost Variance:

Cost variance = Static costs - Actual costs. From the data, actual costs are not directly specified but can be inferred. Assuming actual costs are $4.2 million (for simplicity), then cost variance = $4.2 million - $4.2 million = $0, representing no variance. If actual costs differed, this variance would reveal whether the hospital spent more or less than budgeted. A favorable cost variance (less expenditure) would contribute to better profit outcomes, while an unfavorable variance would indicate cost control issues.

Relationship of Variances:

The net effect of revenue and cost variances determines overall profit variance. If revenue decreases by $0.2 million and costs are on target, profit diminishes accordingly. Optimally, cost control measures could offset revenue shortfalls, but deviations in either side impact overall financial health.

Revenue Side Variance Analysis

- Volume variance:

Volume variance = Flexible revenues - Static revenues. If flexible revenues are considered at actual activity levels, and assuming they are $4.8 million, then volume variance = $4.8 million - $4.7 million = +$0.1 million, indicating higher volume leading to increased revenues.

- Price variance:

Actual revenues - Flexible revenues = $4.5 million - $4.8 million = -$0.3 million, reflecting a lower average revenue per unit or service than planned.

Cost Side Variance Analysis

- Volume variance (cost side):

Static costs - Flexible costs. Assuming flexible costs are $4.7 million, then volume variance = $4.2 million - $4.7 million = -$0.5 million, indicating lower activity led to reduced variable costs.

- Management variance:

Flexible costs - Actual costs = $4.7 million - $4.2 million = +$0.5 million, suggesting cost containment measures were effective, resulting in savings compared to flexible budget expectations.

Interrelationship of Variances

These variances are interconnected; revenue and cost variances together influence overall profit variance. Efficient management aims to optimize revenues while controlling costs, and analyzing the individual variances helps identify specific operational strengths or weaknesses (Drury, 2018). Understanding the relationships among these variances allows managers to implement targeted strategies to improve financial performance continuously.

References

• Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
• Bryson, J. M. (2018). Strategic Planning for Public and Nonprofit Organizations. Jossey-Bass.
• Drury, C. (2018). Management and Cost Accounting. Cengage Learning.
• Harrison, J. S., & Katsioloudes, M. I. (2017). Strategic Management and Business Policy. Routledge.
• Shim, J. K., & Siegel, J. G. (2020). Financial Management. Barron’s Educational Series.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw Hill Education.
• Kaplan, R. S., & Norton, D. P. (2001). The Strategy-Focused Organization. Harvard Business School Press.
• Anthony, R. N., & Govindarajan, V. (2019). Management Control Systems. McGraw-Hill Education.
• Horngren, C. T., Datar, S. M., & Rajan, M. V. (2018). Cost Accounting: A Managerial Emphasis. Pearson.
• Waxman, F. (2013). Financial and Managerial Accounting for Use in Business. John Wiley & Sons.