A budget is a plan in numerical terms of the cost of resources to be incurred in a certain activity or during a certain period. A budget management analysis is therefore an evaluation of how well the cost of resources in carrying out the activity or within the period was within the budget set. It seeks to explain the causes of variation between the budget and the actual cost incurred. Management use the information obtained to take corrective measures when the variances are adverse and reinforcing measures when the variances are favorable.
It will be important to note that it quite hard to set a budget for a hospital because the focus of the hospital is to provide quality healthcare, consequently there might be no measurable relationship between inputs and outputs. It will be more useful to compare the relationship between cash allocated to a particular area and how much is actually required in that area consequently the focus in Sarasota County Public Hospital District budget will be the inputs (Brimson, 2010).
The expenses budget of Sarasota County Public Hospital District for year ended 30th September 2010 will be analyzed as follows:
|Expense Name||Budget||Actual||Variance||Variance Analysis|
|Salaries, wages and fringe benefits||262,251||259,507||2,744||Positive|
|State of Florida medical assistance assessment||5,952||5,379||573||Positive|
|Depreciation and amortization||36,218||30,882||5,336||Positive|
Positive variance means that the actual expense is less than the budgeted.
Causes of variances
All of the above expenses have positive variances resulting from less actual cost incurred compared to the budget. The causes of favorable variances as in the case of Sarasota County Public Hospital District could be because of improving efficiency in operations or lower charges due to negotiated rates with suppliers or service providers. The positive variance in salaries, wages and fringe benefits could be as result of less time used or a lower rate paid per unit time worked as compared to the budget. Ordinarily salaries for permanent staff are fixed and yearly increments can be accurately determined based on contracts or human resources policies and procedures (Jones, 2008). This could mean that the hiring department negotiated well with the casual workers therefore reducing the cost of wages or the casual workers were more efficient therefore, using less time in performing tasks than the budgeted time per task consequently less time units paid for at the budgeted rate. Alternatively, the hospital could have made good use of interns who are normally paid less than permanent staffs do not get as much fringe benefits and the hospital makes no pension contributions for them. The positive variance in supplies could be because of negotiations for lower prices by the purchasing function, improved efficiency therefore fewer supplies used, or procurement of high quality materials resulting into reduced wastage. In addition scaling down of operations could result in reduced cost of supplies but this appears not to be the case as the revenue for the financial year ended September 30th ,2010 is higher than that of 2009. Purchased services too had a positive variance this could have resulted from reduced need for purchased services or better rates for purchased services obtained. Professional fees cost less than budgeted this could be because of lower rates being charged by the professional service providers or less professional services being required. The medical assessment costs also were lower than budgeted this might be because of overestimation of the cost and therefore a positive variance. Disposal of items of property plant and equipment or overestimation of amortization expense could have resulted in the positive variance (Seal, Garrison, & Noreen, 2008).
In the view of the foregoing, it might be concluded that there was increased efficiency in the operations of Sarasota County Public Hospital District since the revenue increased in the financial year ended September 30th 2010 compared to 2009. Alternatively, Sarasota County Public Hospital District uses incremental budgeting whereby the budget is based on the previous year expense and increment in the budget made to cater for inflation and expected expansion. Although this method of budgeting is quick, easy and avoids ‘reinventing the wheel’, it builds in previous inefficiencies and problems and uneconomic activities might be continued. major drawbacks of incremental budgeting are that a justification of incurring the current costs is not made, managers do not feel the need to reduce costs instead they may just approve expenses so that the budget is not reduced in subsequent period ; therefore, just the mere assumption of increased activities and costs in the succeeding period justifies a higher budget. Incremental budgeting is best suited for organizations with efficient operations and fairly stable operating environment (Weetman, 2007).
Benchmarking is the use of set standard or yardstick to compare and evaluate how well a firm is performing. There are three basic techniques of benchmarking which include; internal, competitor, and process or activity. Internal benchmarking is where a branch or department of an organization is used as the standard, competitor benchmarking on the other hand makes use of direct competitor with similar process while process or activity focuses on similar process in another company that is not a direct competitor. In the following paragraphs the three benchmarking will be applied to the seven expenses analyzed and those that might improve budget accuracy in future forecasts and budgets identified and justified.
Salaries, wages and fringe benefits
In the case of Sarasota County Public Hospital District, it would be beneficial to compare salaries, wages and fringe benefits expense with those incurred by other hospitals serving the same market. Comparison with competitors would most applicable when setting a budget for professionals in the medical field, this would enable the hospital retain its staff and be seen as fair employer. By doing so, it would be possible to draw a future forecast and budget that is within the market rate. Process and activity benchmarking would be used when making future forecasts and budgets for casual workers or workers who perform particular activities. Sarasota County Public Hospital District can choose a firm that undertakes a certain activity similar to one carried out by the hospital but that is not carried out by other hospitals. This makes it possible to have a close estimate of future costs.
To be able to set a future forecast a comparison of competitors’ expense and other firms that use the same supplies is important. This will enable the hospital make an objective budget that is within prevailing market rates and number of units used to perform the same task by competitors. Additionally it will reduce over estimation of future, provide a basis of evaluating how efficiently supplies were used in the hospital and areas of improvement. It would also provide a basis of evaluating the hospitals suppliers in terms of quality and pricing and need to change suppliers. The supplies variance for 2010 was positive this could have been due to lack of knowledge of the prevailing market prices and how much was incurred on average in the industry. Internal benchmarking can be used whereby one department in the hospital is set as a yardstick against which all the other departments are evaluated. The department selected should be efficient in supplies usage and therefore a budget of all other departments using the same supplies set based on the selected department.
The budget for purchased services would be based on the comparison to a direct competitor so that the decision makers have the most up-to-date information about relative performance and can set a budget accordingly. The information obtained would be useful in evaluating the performance of the purchasing department and its ability to get best quality and the best price for the hospital. Just like in the case of supplies this information would provide a basis of evaluating the need to change service providers and negotiate for better terms. Internal benchmarking would be useful in analyzing usage patterns and trends therefore adjusting the budget accordingly.
Since professional fees are incurred by Sarasota County Public Hospital District as a whole it would not be logical to set an internal benchmark but competitor or another firm with the similar professional fees would give an objective basis of setting a budget. Additionally, this information would provide a basis of evaluating whether the professional service providers are overcharging the hospital therefore negotiate for better terms Professional fees could include auditing, accountancy, and legal fees, setting a competitor with the same turnover as a benchmark would enable the hospital improve the accuracy of future forecasts and budgets.
State of Florida medical assistance assessment
External data on costs incurred by a competitor would be the most appropriate yardstick to set a budget for State of Florida medical assistance assessment by Sarasota County Public Hospital District. This is because the cost is incurred by the whole hospital and the only objective basis of setting a standard would be using competitor information because it is likely that the cost is charged using a certain scale by the state.
Depreciation and amortization
Depreciation method of property, plant and equipment set by Sarasota County Public Hospital District could be based on industry practice specifically a direct competitor with the similar type of property, plant and equipment. Given the specific nature of hospital equipment and limited market, it would be difficult to accurately budget for depreciation. Consequently, a direct competitor would be the most reliable source of depreciation and amortization method to use.
It will of great value for Sarasota County Public Hospital District to review its budgeting technique as it appears to overestimate costs and this can give rise to inefficiencies into the operations and go uncorrected. The use of the three benchmarking techniques namely internal, competitor and process or activity would go a long way in improving standards of performance and reducing expenses.
Brimson, J. A. (2010). Activity Accounting: An Activity-based Costing Approach. London: John Wiley and Sons.
Jones, M. (2008). Management Accounting: An Introduction. Chicago: John Wiley and Sons.
Seal, W., Garrison, R. H., & Noreen, E. (2008). Management Accounting. New York: McGraw-Hill.
Weetman, P. (2007). Financial and Management Accounting: An Introduction. Chicago: Prentice Hall.