Healthcare organizations often deal with severe financial issues that result in budget cuts. It is the responsibility of managers to maintain the highest quality of care for their consumers. Managers makes use of budgetary tools when executing these tasks to help them better control the costs and enhance a more efficient operation. According to (Cleverly, Song & Cleverly, 2011), Budgeting gives managers the tools necessary to ensure the availability of required resources to meet the organization’s goals and objectives, communicate strategies and monitor results. Organizations make use of varying approaches when introducing their budgetary process. Some make use of the budget update for the current year for projected revenue growth and inflation. There are also others who take up the approach of a clean slate, compelling the managers to justify their staffing needs and expenses on an annual basis. All the same, the most effective budgeting process is one that will reflect the true financial position of an organization, monitor the performance, and provide flexibility.
There are different kinds of budgets, and one of them is budgetary variance. When talking about the budgetary variance model, favorable budget variance, is a term that is used to refer to positive gains or variances while unfavourable budget variance is used to describe the negative variance (short and losses). Budgetary variance model can also be examined as flexible or fixed, and they can be controlled in some instances while they cannot in others ( Reddy, Loh & Kane, 2016). In this analysis, the focus is in the evaluation of the performance of a hospital’s radiology department manager.
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Summary of the Radiology Department
| Actual | Original Budget | Variance | |
| Procedures | 100,000 | 12,000 | 20,000 (Unfavorable) |
| Variable Costs | $1,200,000 | $1,320,000 | $120,000 (Favorable) |
| Fixed Costs | 600,000 | 600,000 | - |
| Total costs | $1,800,000 | $1,920,000 | $120,000 (Favorable |
| Average Cost per Unit | $18.00 | $16.00 | |
| Variable Cost per Unit | $12.00 | $11.00 | |
| Fixed Cost per Unit | $6.00 | $5.00 |
The table above gives a representation of the summary of the radiology department data. At the beginning of the year, the department of the hospital reported a favorable $120,000 cost variance, and an unfavourable variance of $200,000, which can be broken into spending and volume variables. Proper financial planning is the key determinant of th e success of any given service, output, or unit within a healthcare facility, and this can only be achieved by ensuring that there is prudent use of variance analysis and budget. It is through these budgets that the radiology department will be able to give proper future financial plans for a specified period in proper records of figures that show the cost implication that come with a given unit. The preparation of these budgets is the responsibility of the cost managers of the healthcare facilities.
(Wlezien & Soroka, 2013) discusses the importance of budgetary analysis, which he argues is necessary when it comes to the planning, monitoring, and control of the financial progress and activities of a department. The implication of this is that that budgeting process is key when it comes to the creation of success plans and the translation of business goals into a reality. For this reason, it is important for managers to use static, flexed, and the actual budgets when it comes to analyzing the department’s performance in incomes, costs utilization, and the analysis of factor of production. While budgets are usually prepared for use internally, they are crucial in guiding the management in the process of explaining their financial projections and goals. This process can be done on a monthly basis, semi-annually, or annually. However, it is not a guarantee that the static budget will always reflect the actual results. All the same, it is an important tool for showing the financial performance, and it can be used as the standard budget. A negative variance is treated as favorable while a positive deviation from the static budget is recorded as a favorable variance.
Analysis of the Accounting Tool Model
This paper will mainly focus on the application of variance analysis, in the form of a budgetary variance model, and it makes use of the summary provided in the radiology department financial report. This report focuses on the performance of the hospital manager at the radiology department. The analysis will evaluate the effectiveness of the report in describing the department’s true budgetary compliance and also gives an explanation for the analysis of the manager.
At the beginning of the year, the radiology department reports a highly favorable cost variance. It is important to understand that radiology is a very crucial department at the hospital, and it is a major medical service offered by the healthcare industry today. It is, therefore, not surprising that the department budget plays a major role in unearthing the patterns and trend within the department. This truth has especially been made necessary and evident by the growth and development in technology.
An Explanation of the Budgetary Variance Model Used
Budgetary variance is a term that is used to define the difference between what had been budgeted for and what was actually achieved. This model applied in this case of the radiology department is considered as being favorable because it results in positive gains. There are also flexible budgets, or fixed budgets, which are controllable at times. The controllable budget variances are usually expenses, although a substantial portion of expenditure can be committed costs that are not possible to alter in the short term. For instance, in a situation of a positive telephone expense budget variance of $3,000 and a negative electricity budget variance of $2,000, then these two lines items could be combined for the purposes of reporting to give a net positive difference of $1,000. The best way of summing up a budgetary variance is by first setting the annual spending figure for high-level planning. The firm will then break down this annual number into quarterly or monthly figures as the manager pleases. In this case, the budget analyst has calculated the variance by subtracting the initially budgeted figure from the actual spending figure and then reported the variance as both a percentage of the budget figure and as an amount. This data is critical and it needs to be examined and analyzed periodically to detect any possible changes.
The total variance would be calculated as the actual cost less the assigned cost
The radiology department recorded an unfavorable variance of $200,000, and this is opposed to a favorable variance of $120,000. This unfavorable variance of $200,000 can be broken into volume and spending variances:
While the volume variance might not be the responsibility of the department manager it is important to analyze the cause of the unfavorable spending variance of $100,000.
This paper has discussed how the budgetary variance model is used by applying it to the summary of the radiology financial report that is discussed in the text. We have done an evaluation of the performance of the manager at the hospital’s radiology department and also done an analysis of the effectiveness of the report in describing the cost variance of the department. The analysis has also gone into the details of the rationale that is relevant to the performance of the manager. As stated in the introduction, the budgetary variance analysis model is a tool that comes to play when analyzing both the favorable and unfavorable variances. The key goal of this paper was the evaluation of the accuracy of the manager in performance and reporting. The report analysed the manager’s true variance, and it found that the unfavorable was way greater than he had reported. It also made note of the fact that he should have evaluated the findings with the goal of uncovering all the underlying reasons that could have caused this negative variance. When the manager gets more details on the same, then it will be possible for him to break the details down by both efficiency and price variances for his department.
References
Cleverley, W. O., & Cleverley, J. O. (2017). Essentials of health care finance . Jones & Bartlett Learning.
Reddy, A. S., Loh, S., & Kane, R. A. (2016). Budget Variance Analysis of a Department-wide Implementation of a PACS at a Major Academic Medical Center. Journal of Digital Imaging, 19 (Suppl 1), 66–71.
Wlezien, C., & Soroka, S. N. (2013). Measures and models of budgetary policy. Policy Studies Journal , 31 (2), 273-286.
