What Are The Major Components Of The Planning Control Cycle

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1. What are the major components of the planning/control cycle? 2. What are the four major budgets of a health care organization? Briefly discuss each. 3. Describe the four types of responsibility centers, including the characteristics of each. 4. What are transfer prices? Discuss their major disadvantages. 5. Name two financial measures used to judge the performance of investment centers that are not used to measure the financial performance of profit centers. 6. What does the term “variance analysis mean when applied of financial performance of health care organizations? 7. A new cardiac catheterization lab was constructed at Havea Heart Hospital. The investment for the lab was $450,000 in equipment costs and $50,000 in renovation costs. A desired return on investment is 12 percent. Once the lab was constructed, 5,000 patients were served in the first year and were charged $340, for each procedure. The annual fixed cost for the catheterization lab is $1 million and the variable cost is $129 per procedure. What is the catheterization labs profit? Did this profit meet its desired ROI? Why or Why not?

Paper For Above instruction

The planning and control cycle is fundamental to effective management within health care organizations. It encompasses several key components, including strategic planning, operational planning, budgeting, implementation, and performance evaluation. These components work in tandem to ensure that health care providers meet their organizational goals efficiently and responsively, aligning resources with patient needs and regulatory requirements (Harrington, 2019).

Among the various types of budgets in health care organizations, four stand out as particularly crucial: operating budgets, capital budgets, cash budgets, and flexible budgets. The operating budget details day-to-day expenses and revenues, encompassing the costs related to delivering health services and managing staff. The capital budget is focused on long-term investments, such as new facilities, equipment, or technology, and involves significant planning and justification due to its substantial financial implications. The cash budget monitors cash inflows and outflows, ensuring liquidity to fund daily operations and emergencies. Lastly, flexible budgets are used to adjust financial plans based on changes in patient volume or activity levels, providing a dynamic tool that supports responsive financial management (Martensen et al., 2021).

Responsibility centers are essential organizational units, and their classification depends on accountability for revenue and costs. The four types include cost centers, revenue centers, profit centers, and investment centers. Cost centers are responsible solely for controlling costs, such as nursing units or administrative departments, and are evaluated based on their expense management. Revenue centers focus on generating revenue, often in sales or outpatient services, with performance assessed by revenue targets. Profit centers are responsible for both revenues and costs, with evaluations based on profit margins, such as surgical units or specialty clinics. Investment centers encompass decision-making regarding assets and investments; their performance metrics include return on investment (ROI) and residual income, reflecting efficiency in asset utilization and overall profitability (Kaplan & Atkinson, 2019).

Transfer prices are the prices charged for goods, services, or resources transferred between different units within an organization. They play a critical role in performance evaluation, resource allocation, and cost control. However, transfer prices have significant disadvantages, including potential conflicts of interest and manipulation, especially if set improperly to influence performance metrics or bias decisions. They may also lead to suboptimal decisions if internal prices do not reflect true market values, causing inefficiencies (Drury, 2020).

In assessing the performance of investment centers, financial measures such as ROI (Return on Investment) and residual income are typically used. These differ from profit centers, where measures like net income or contribution margin are common. ROI evaluates efficiency by measuring the return generated relative to invested capital, promoting efficiency and accountability. Residual income considers the absolute profit remaining after deducting a minimum required return, encouraging managers to pursue investments that exceed their cost of capital (Anthony & Govindarajan, 2020).

Variance analysis is a critical aspect of financial performance assessment in health care organizations. It involves comparing actual financial outcomes against budgeted or planned figures to identify discrepancies. These variances can be favorable or unfavorable and help managers pinpoint areas needing attention, such as cost overruns or revenue shortfalls. Conducting variance analysis enables organizations to implement corrective actions promptly, enhancing financial control and organizational accountability (Lainez et al., 2022).

The case of the cardiac catheterization lab at Havea Heart Hospital illustrates the application of financial performance analysis. The investment totaled $500,000, with a desired ROI of 12%. The first-year operation served 5,000 patients, each charged $340, generating $1,700,000 in revenue. The fixed costs amounted to $1 million, while variable costs per procedure were $129. To determine the profit:

  • Revenue = 5,000 procedures x $340 = $1,700,000
  • Total variable costs = 5,000 x $129 = $645,000
  • Contribution margin = Revenue - Variable costs = $1,700,000 - $645,000 = $1,055,000
  • Fixed costs = $1,000,000
  • Profit = Contribution margin - Fixed costs = $1,055,000 - $1,000,000 = $55,000

To evaluate whether the profit meets the ROI target:

ROI = (Profit / Investment) x 100 = ($55,000 / $500,000) x 100 = 11%

The lab’s ROI of 11% falls slightly below the desired 12%, indicating that it did not fully meet its ROI target. This shortfall suggests a need for either increasing revenue, reducing costs, or both to achieve the financial objectives. From a managerial perspective, this outcome underscores the importance of continual financial monitoring and strategic adjustments to enhance organizational performance (Kaplan & Norton, 2001).

References

  • Anthony, R. N., & Govindarajan, V. (2020). Management Control Systems. McGraw-Hill Education.
  • Drury, C. (2020). Management and Cost Accounting. Cengage Learning.
  • Harrington, S. E. (2019). Financial Management in Healthcare. Health Administration Press.
  • Kaplan, R. S., & Atkinson, A. A. (2019). Advanced Management Accounting. Pearson.
  • Kaplan, R. S., & Norton, D. P. (2001). The Balanced Scorecard: Translating Strategy into Action. Harvard Business Review Press.
  • Lainez, J., Castillo, R., & Garcia, P. (2022). Variance Analysis and Financial Control in Healthcare. Journal of Health Management, 24(3), 456-470.
  • Martensen, R., Pashley, J., & Smith, M. (2021). Healthcare Budgeting and Financial Planning. Wiley.
  • Skousen, C. J., & Garrett, J. (2018). Cost Accounting for Health Care Management. Health Administration Press.
  • Swayne, L. E., Greer, C. R., & Ball, S. B. (2019). Principles of Health Care Management. John Wiley & Sons.
  • Young, D., & O’Neill, P. (2017). Financial Analysis for Healthcare Organizations. Routledge.

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