Health and Human science 455

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Chapter 16:
Operating Budgets

Budget Types

  • An organization’s objectives define
  • specific activities
  • how they are assembled
  • levels of operation
  • While an organization’s performance standards
  • set out performance levels
  • A budget quantifies these activities into financial terms.

Budget Process Objectives

Objectives should provide:

  • Written expression, quantified, of policies and plans
  • Basis to evaluate financial performance according to policies and plans
  • Useful tool for cost control
  • Creation of cost awareness throughout the organization

Budget Types

There are basic differences between two budget types:

  • Operating budgets
  • Capital expenditure budgets

Operating Budgets

  • Deal with actual short-term operating revenues and operating expenses
  • Generally cover the next year (a 12-month period)

Capital Expenditure Budgets

  • Deal with capital expenditures for the organization (not operating revenues or expenses)
  • May also cover the next year, but with a futuristic view; may cover a five- or even
    ten-year period

Responsibility Centers

  • Cost Centers (manager responsible for controlling costs)
  • Profit Centers (manager responsible for both costs and revenue)

Budget Viewpoints

  • Transactions outside the operating budget may include:
  • Grants received by the organization
  • Foundation transactions
  • So if transactions are “outside,” they would not be part of the operating budget.

Budget Viewpoints

  • Grants received by the organization may have restricted funds that require separate accounting.
  • If so, the separate accounting requirement generally means their transactions will be outside the operating budget.

Budget Viewpoints

  • Foundation transactions should require separate accounting because the foundation will be a legally separate organization
  • The separate accounting requirement should mean their transactions will be outside the operating budget.

Identifiable Versus Allocated
Budget Costs

  • Within a departmental budget, certain costs will be specifically identifiable while others will be allocated instead.

Budget Basics Review

Regarding Identifiable versus Allocated Budget Costs:

  • Mostly identifiable = Direct patient care and supporting patient care
  • Usually allocated = general and administrative expense and patient related expense
  • Maybe not included at all in a manager’s budget = financial related expense

Fixed Versus Variable Costs

  • Variable cost rises or falls in proportion to a rise or fall in volume. (Examples of volume: number of procedures or number of patient days.)
  • Fixed cost does not change even though volume rises or falls within a wide range.

Building an Operating Budget: Construction Phases

  • Plan
  • Gather information
  • Prepare input
  • Construct/submit draft version of budget
  • Make required revisions to draft
  • Present preliminary budget
  • Make required revisions to preliminary
  • Submit final budget

Building an Operating Budget: Construction Elements

  • Format to be used
  • Budget scope
  • Available resources
  • Levels of review
  • Time frame

Building an Operating Budget: Information Sources

  • For the Operating Expenditures Plan:
  • Operating Revenue Forecast
  • Staffing Plan or Forecast
  • Other Operating Expenses
  • For the Preliminary Operating Budget:
  • Capacity Level Checkpoints

(See Figure 16-5.)

Building an Operating Budget: Assumptions

  • A series of assumptions are made during construction; many key assumptions are within forecasts used for the budget construction process.
  • Sufficient information at the proper level of detail is essential.

Building an Operating Budget: Assumptions: Questions to Ask

  • Are special projects going to use resources during the new budget period?
  • Are operations going to be placed under unusual or inconvenient circumstances during the new budget period? (Renovation is an example.)

Building an Operating Budget: Computations

  • Supported by their assumptions
  • Capable of being replicated or reproduced by another qualified individual
  • Comparable (as discussed in the text)
  • Budget assumptions and computations are intertwined in the construction process.

Static Budgets

  • Are essentially based on a single level of operations. That level of operations—or volume—is never adjusted during the budget period.

(See example in Table 16-4.)

  • It doesn’t move—therefore it is “static.”

Flexible Budgets

  • Are based on a level of operation that will change. In other words, the level of operations, or volume, is adjusted to show change during the budget period.

(See example in Table 16-5.)

  • It is adjusted, or flexed—therefore it is “flexible.”

Budget Review

To review a budget, the manager needs to know

  • How the budget report format is constructed
  • How to annualize partial year expenses

(More details are in the chapter.)

Building Budgets

  • The budget process should begin with a review of the strategy and objectives.
  • Remember: Building a budget means making a series of assumptions.

Building Budgets

To build a budget, a manager must consider

  • The workload forecast (it must tie into the forecasted volume)
  • Whether budget projects will use resources during the budget period
  • Whether budget operations will be placed under unusual or inconvenient circumstances during the budget period (remodeling, for example)

Budget: Example 16-A

Budget Practice Exercise 16-1