Chapter 11

Principles of Budgeting

Chapter outline Introduction Basic planning Procedures

Managing cost centers Relationship of budget and objectives Budget stages

Formulation stage Review and enactment stage Execution stage

Chapter outline (continued)

Cost factors Fixed, variable, and sunk costs Direct and indirect costs Cost accounting Service units Unit of service Chart of accounts Inventory and cost transfer

Chapter outline (continued)

Financial accountability The cost of nursing care Activity-based costing

Definitions Budget Revenue Revenue budgeting Expenses Expense budgeting

Chapter outline (continued)

Patient days Fiscal year [FY] Year to date[YTD] Average daily census [ADC] Hours of care Caregiver Operating budget Cost-to-charge ratios Cost-benefit analysis

Chapter outline (continued)

Zero-base budgeting Program budgeting

Operating or cash budget Negative cash flow Developing the operating budget

Personnel budgeting Non-productive full time equivalents

Supplies and equipment budget

Chapter outline (continued)

Product evaluation Product evaluation committee

Capital budget Performance budgeting Revenues The controlling process

Decentralizing the budget Monitoring the budget

Motivational aspects of budgeting

Chapter outline (continued)

Cutting the budget Legitimate budget activities

Learning objectives and activities Discuss concepts of budgeting. Identify examples of budget-planning steps. Identify examples of stages of the budget. Examine elements of cost accounting in a

health-care organization. Define selected terms related to budgeting. Differentiate between direct and indirect

costs.

Learning objectives and activities (continued)

Differentiate among fixed, variable, and sunk costs.

Describe various budgets: operating or cash budgets, personnel budget, supplies and equipment budget, capital budget.

Discuss the budget as a controlling process. Discuss monitoring of the budget. Discuss motivational aspects of the budget.

Learning objectives and activities (continued)

Discuss cutting the budget. Observe preparation of the budget for

an agency or a cost center.

Budget

…is an operational plan, stated in income and expense terms, covering all phases of financial activity for a future division of time.

Budgeting

…is an ongoing activity in which revenues and expenses are managed to maintain fiscal responsibility and fiscal health.

Cost center

…is a given area of assigned accountability for both direct and indirect expenditures.

Budget stages (calendar)

…cover a fiscal year and include the formulation stage of gathering and organizing information, the review and enactment stage of presenting the budget for approval by management and the governing board, and the execution stage in which cost center managers enact the budget.

Cost accounting

…is a system that assigns all costs to cost centers by direct costing if they are direct costs of patient care, by transfer costing if from a patient care support department, or cost allocation if not related to direct patient care or support.

Fixed costs

…are costs that remain constant even as volume increases or decreases over a period of time.

Variable costs

…are related to volume and increase or decrease according to use.

Sunk costs

…are fixed expenses that cannot be recovered even if a program is cancelled.

Direct costs

…are the costs of providing the product or service.

Indirect costs

…are costs incurred in support of providing the product or service.

Activity-based costing

…is a system that accounts for the total process of doing business from personnel, supplies, material, and parts to installation and service of products.

P. F. Drucker

Revenue budgeting

…is the process by which an agency determines revenues required to cover costs and establishes prices to generate these revenues.

Expense budgeting

…is the process of forecasting, recording, and monitoring the monetary needs of an organization relative to personnel, supplies, and equipment for controlling purposes.

Operating budget

…is the overall plan identifying expected revenues and expenses, both fixed and variable, for the forthcoming fiscal year.

Cost-to-charge ratio

…is a tool for computing the cost of providing a service used within the context of the operating budget to determine charges to the patient.

Zero-base budgeting

…is a method of budgeting used to control costs in which everything must be justified starting from zero.

Cost-benefit analysis

…is where costs of a service are compared to its benefits to determine the least costly intervention that will achieve similar or better results.

Negative cash flow

…is a condition in which collections or revenues lag behind expenditures.

Service units

…are measurable units of productivity or volume for identifying and counting costs.

Chart of accounts

…is a system that includes a number and table for each cost center and is divided into major classifications and sub-codes.

Inventory

…is an accurate count of on hand equipment and supplies.

Financial standards

…are objects (budgets, the Medicare cost report, and a system of accountability for managing revenues and expenses) that will insure the judicious use of costly health care personnel and material.

Performance budgeting

…focuses on the activities of a cost center such as indirect care, direct care, and quality monitoring with each activity having objectives.

Personnel budget

…is projected personnel needs including wages, salaries, and fringe benefits for specific numbers and skills for a fiscal year.

Supplies and equipment budget

…is projected costs of supplies and equipment costing less than the base set for capital equipment for a fiscal year.

Capital budget

…is projected fiscal year costs of new or replacement equipment that will cost above a base amount and that will be used over a period of years.

Unit of service

…is a measurement of the output of agency services consumed by the patient such as minutes or hours in the surgical suite or recovery room.

Revenue

…is the projected and actual income from sale of goods and services.

Expenses

…are the projected costs of doing business.

Patient days

…are the cumulative data of days spent in a health care institution by patients.

Fiscal year (FY)

…is the budget year.

Year to date (YTD)

…is the sum of any statistical or demographic data for the fiscal year to a current date.

Average daily census (ADC)

…is summary data for an aggregate number of patients divided by a specific number of days.

Hours of care

…are the number of hours of care allocated per category of patient for a 24-hour period.

Care giver

…is a person providing care to a patient or patients.

Budgeting procedures Determine the productivity goal Forecast workload Budget patient-care hours and staffing

schedules Plan nonproductive hours Chart productive and nonproductive time Estimate costs of supplies and services Anticipate capital expenses

Cost factors Fixed, variable, and sunk costs Direct and indirect costs Cost accounting Service units Unit of service Chart of accounts Inventory and cost transfer

Cost factors (continued)

Financial accountability The cost of nursing care

Activity based costing

(Exhibit)

(Exhibit)

Cost-to-charge ratio

…if the charge for 1 hour of nursing care to a level 1 patient is $225.00 and the cost-to-charge ratio is 0.850390, then the cost is 0.8504 x $225 = $191.34

($191.34:$225.00 = $191.34/$225 = 0.8504)

Break-even analysis(Exhibit)

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(Exhibit)