You have been asked by your supervisor to analyze your division’s past financial performance and create a new budget that minimizes revenue-cycle risks through the application of flexible budgeting techniques. The objective is to allow the organization to remain profitable under as wide a range of scenarios as possible without unduly compromising services.
Previous budgets have been “static” in assigning costs and have been inaccurate predictors of actual performance. This has led to difficulties in managing the revenue cycle. There have been periods when the organization appears to be beating expectations and periods when it is underperforming.
Your professor will present you with a scenario outlining revenues and expenses over a fixed period. This scenario will include a combination of fixed and variable expenses as well as information on patient loads.
To complete this assignment:
1. Review the current budget provided by your professor, and answer the following questions:
How did the organization perform on an annual basis?
When comparing the static budget versus actual results, which line items in the income statement are Favorable (F) or Unfavorable (U)?
What are the per-unit costs and contribution margins?
Which line items presented the greatest variances?
2. Redraft the current budget provided in the template using flexible budgeting techniques to better accommodate variances in patient loads and create a budget that is a more accurate predictor of actual performance. After redrafting the budget, address the following:
Identify which line items are now Favorable (F) or Unfavorable (U).
What should have been the target operating income?
Which line items should be further explored for inefficiencies?
For the line items identified in (c), makes recommendations for
3. Identify key profitability loads
Using budgeted data, how many patients and revenue dollars would the health system need to break even?
Using budgeted data, how many patients and revenue dollars would be required to achieve a target profit of $100,000?
4. Summarize your argument for why this model is the most appropriate type for operational budgeting for your organization and explain the operational changes that would need to be implemented to use flexible budgets if the organization is used to working with static budgets.
