Finance it Is Very Important Term Paper

Pages: 6 (1938 words)  ·  Style: APA  ·  Bibliography Sources: 4  ·  File: .docx  ·  Level: Master's  ·  Topic: Economics


It is very important to have fiscal accountability and responsibility for the proper functioning of a hospital. Following are the areas that need to be considered when budget management functions are being thought of:

PLANNING -- it comes under the fiscal responsibilities to predict the resource needs in terms of the material as well as human resources and the development of plans to ensure that those needs are met (Sid, Anandi and Robert, 2007).

ORGANIZING -- it is very important to gather and review fiscal reports regularly so that adjustments can be made in personnel usage and supply by staying within the budget.

LEADING -- it is also a fiscal responsibility to ensure that the employees are well informed about the budget of a unit and to also have them involved when it comes to adjusting the supply as well as personnel usage so that it could remain within the budget.

EVALUATING -- it is either the cost control or the real economic use of complete resources which comes under the fiscal responsibilities (Sid, Anandi and Robert, 2007).


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40 hours in a week makes one FTE and in a year one FTE comes up to be 2080 hours. It is only the paid hours that are included in the FTE calculations in order to determine the budget variance; these calculations include sick leave, vacation and holiday. An example of this sort of scenario can be that there are 22 positions scheduled in a week for any one unit however, out of those 22 only 20 will be accounted for as some of the staff is working less than 40 hours in a week. The point that should be noted here is that FTEs are calculated in such a manner that the number of paid hours in a particular time are divided by the number of hours that equal to 1.0 FTE for that specific time period (Sid, Anandi and Robert, 2007).

Term Paper on Finance it Is Very Important Assignment

The difference that exists between an actual figure and a budgeted figure (or flexed budget figure) is known as variance. It is also possible that a variance refers to the FTEs (volume), patient days (volume) and dollars (price). It is possible for the variance to be thought of as unfavorable or favorable (Sid, Anandi and Robert, 2007).

Example: if there were a total of 525 patient days in a month and your unit was budgeted for 500 days then there is a favorable patient day variance of 25 that has been experienced by your unit. However, if the actual FTEs paid were 21.5 but your unit got budgeted for 20 FTEs then there has been an unfavorable FTE variance of 1.5 which has been experienced by your unit (Sid, Anandi and Robert, 2007).

It is very important to identify a variance in a timely manner in order to control it. Therefore, determining the cause and implementing plans to offset/correct unfavorable variance in a timely manner is very important (Sid, Anandi and Robert, 2007).

Variance Classifications and Specific Strategies to Manage Budgets within Forecasts.

It is possible for anyone of this variance to occur and by using a particular formula the quantum of variance can be determined (Sullivan and Steven, 2003).

1. It is only when the actual volume is less or more than the budgeted volume that a volume variance takes place. FTEs or patient days can be used to express the volume. Following is the calculation that can be used to calculate the volume variance (Sullivan and Steven, 2003):

(Budgeted Volume -- Actual Unit Volume)(Budgeted Rate) = Volume Variance

2. When the average unit cost of an item is different from the actual budgeted amount, it is then that the Unit Cost Variancecomes into existence. Following is the calculation to calculate the unit cost variance (Sullivan and Steven, 2003):

(Budgeted Unit Price -- Actual Unit Cost)(Actual Volume) = Unit Cost Variance

3. The kind of unit cost variance that is only associated with the dollar per hour costs of the personnel is known as Labor Rate Variance. Following is the formula to calculate the labor rate variance (Sullivan and Steven, 2003):

(Budgeted Rate -- Actual Rate)(Volume Adjusted Budgeted Hours) = Labor Rate Variance

4. When the actual amount of a resource that has been used is different from the amount which was anticipated to be used for any particular workload it is known as Quantity Variance. Following is how the quantity variance is calculated:

(Budgeted Use -- Actual Use)(Budgeted Unit Cost) = Quantity Variance

5. Volume variance which is particular to the personnel use is known as Efficiency Variance. Following is how the efficiency variance is calculated:

(Volume Adjusted Budgeted Hours -- Actual Hours)(Budgeted Rate) = Efficiency Variance (Sullivan and Steven, 2003).

Strategies to Manage Budgets within Forecasts

As, it has been discussed before as well that it is very important to identify a variance in a timely manner in order to control it. Therefore, determining the cause and implementing plans to offset/correct unfavorable variance in a timely manner is essential. For example, if six months into the fiscal year an unfavorable salary variance of about $25,000 is noted, then there will be a need to take steps in order to (Sullivan and Steven, 2003).


define the reason of variance (rate v. volume) and b.

create plans that would help in offsetting the variance, like for the rest of the year holding a part of a position open or reducing the usage of float pool, overtime and agency personnel.

Therefore as a fast solution to the variance problems it is at the functional unit level that the volume adjustments of the budgets are carried on. There needs to be a mechanism on the basis of which the reporting system could build its calculations as, it is possible for the rate of variability for flexing budgets to get altered every year and since it is against the volume budgets that the departmental and unit performance are measured (Sullivan and Steven, 2003).

It should also be realized that it is on the basis of the budgeted workloads that the expense budget is decided upon. It is the actual workload that the flexed budget is based upon. The variable expense budgets are flexed down or up on the basis of the actual volumes. The percentage of volume fluctuation is shown according to the increase or decrease in the variable budget of a unit (Sullivan and Steven, 2003).

Actual vs. Budget Comparison Their Possible Reason

A lot of variance examples need to be studied in order to get an actual idea of the reasons behind the occurrence of variance. In the previous paragraphs a few of the formulas have been mentioned to calculate variances (Sullivan and Steven, 2003).


Total Variance = Unit Cost Variance + Volume Variance

Unit Cost Variance = (Budgeted Rate -- Actual Rate) (Actual Volume)

Volume Variance = (Budgeted Volume -- Actual Volume) (Budgeted Rate)

Budgeted Rate = Budget Allocation/Budgeted Volumes

Actual Rate = Actual Expense/Actual Volume

Assume your monthly patient days were:

Budget: 450

Actual: 540

Variance: 90

RN Salaries:

Unflexed Budget: $47,474

Actual: $49,597 Variance: ($2,123)

Determine how much of the salary variance is due to unit cost and how much due to volumes.

Budget Rate = 47,474/450 = 105.5

Actual Rate = 49,597/540 = 91.85

Unit Cost Variance = (105.5 -- 91.85) (540) = 7,371

Volume Variance = (450 -- 540) (105.5) = (9,495)

Total Variance = 7,371 + (9,495) = (2,124)


It is by $13.65 that the actual rate is less than the budgeted rate. The salaries would have been over by approximately $7,371 had the unit worked at the budgeted rate but since it was with the increased volumes that the productivity was up;cost avoidance has been seen. It is due to the increased volume that the unfavorable variance is there. Only because of the increased number of patient days (volume variance) there has been an increase of $9,495 in the total costs. Although, the budgeted rate was more than the actual labor rate therefore, $7,371 of the negativevariance was recovered which left only $2,124 of the overall negative variance (Sullivan and Steven, 2003).

The causes of variance can be external or internal. Changes in policies, technological changes or efficiency changes of the nurses can be some of the internal cause due to which variance can occur (Sullivan and Steven, 2003).

The changes in price, available staff, and changes in the census can be some of the external changes. It is possible to detect the census change if it occurred seasonally. This can be done by looking at the previous trends and cases where the variables were similar (Sullivan and Steven, 2003).

Three Benchmarking Techniques Might Improve Budget Accuracy In Future Forecasts

Benchmark against Workload Based on Cost Centre

Hours per workload unit (HPWU) for FTEs is what the benchmark centered on workload will focus on and for the salary and non-salary expense the Cost per Workload Unit (CPWU) is… [END OF PREVIEW] . . . READ MORE

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