Operating Budget Formulation and Evaluation

Instructions:  First run through the Practice Exercise 15-1.  Then complete Assignment Exercise 15–1: Operating Budget Formulation and Evaluation

Practice Exercise 15–1: Budgeting

Budget assumptions for this exercise include both inpatient and outpatient revenue and expense. Assumptions are as follows:

As to the initial budget:

The budget anticipated 30,000 inpatient days this year at an average of $650 revenue per day.

• Inpatient expenses were budgeted at $600 per patient day.
• The budget anticipated 10,000 outpatient visits this year at an average of $400 revenue per visit.
• Outpatient expenses were budgeted at $380 per visit.

As to the actual results:

• Assume that only 27,000, or 90 percent, of the inpatient days are going to actually be achieved for the year.
• The average revenue of $650 per day will be achieved for these 27,000 inpatient days.
• The outpatient visits will actually amount to 110 percent, or 11,000 for the year.
• The average revenue of $400 per visit will be achieved for these 1,100 visits.
• Further assume that, due to the heroic efforts of the Chief Financial Officer, the actual inpatient expenses will amount to $16,100,000 and the actual outpatient expenses will amount to $4,000,000.

Practice 15-1

1. Set up three worksheets that follow the format of those in Example 13A (see solution below). However, in each of your worksheets make two lines for Revenue; label one as Revenue-Inpatient and the other Revenue-Outpatient. Add a Revenue Subtotal Likewise, make two lines for Expense; label one as Expense-Inpatient and the other Expense-Outpatient. Add an Expense Subtotal line.
2. Using the new assumptions, complete the first worksheet for “As Budgeted.”
3. Using the new assumptions, complete the second worksheet for “Actual.”
4. Using the new assumptions, complete the third worksheet for “Static Budget Variance.”

Solution to Practice Exercise 15–1

Your initial budget assumptions were as follows:

Assume the budget anticipated 30,000 inpatient days this year at an average of $650 revenue per day, or $19,500,000. Further assume that inpatient expenses were budgeted at $600 per patient day, or $18,000,000. Also assume the budget anticipated 10,000 outpatient visits this year at an average of $400 revenue per visit, or $4,000,000. Further assume that outpatient expenses were budgeted at $380 per visit, or $3,800,000. The budget worksheet would look like this:

Now assume that only 27,000, or 90 percent, of the patient days are going to actually be achieved for the year. The average revenue of $650 per day will be achieved for these 27,000 days (thus 27,000 times 650 equals 17,550,000). Also assume that outpatient visits will actually amount to 110 percent, or 11,000 for the year. The average revenue of $400 per visit will be achieved for these 11,000 visits (thus 11,000 times 400 equals 4,400,000). Further assume that, due to the heroic efforts of the Chief Financial Officer, the actual inpatient expenses will amount to $16,100,000 and the actual outpatient expenses will amount to $4,000,000. The actual results would look like this:

Since the budgeted revenues and expenses still reflect the original expectations of 30,000 inpatient days and 10,000 outpatient visits, the budget report would look like this:

Note: The negative effect of the $1,550,000 net drop in revenue* is offset by the greater effect of the $1,700,000 net drop in expenses,** resulting in a positive net effect of $150,000.

Assignment Exercise 15–1: Operating Budget Formulation and Evaluation

Create a budget for Metropolis Health System for next fiscal year from the data in the Chapter 28 Case Study page 407.

1. Create a budget for the next fiscal year. Describe all the details of all assumptions you needed in order to build this budget, as the assumptions are described above in the practice exercise.
2. Use the Checklist for Building a Budget (Exhibit 13–2) and critique your own budget by answering the Checklist A1 questions (page 441).

Submit your computations in worksheet.  On the worksheet, create a textbox that contains a short essay describing your detailed assumptions and your critique of your budget in an attachment.  Use the following naming format:  Lastname.FirstName.BudgetEvaluation