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## Budgeting

Budget assumptions for this exercise include both inpatient and outpatient revenue and expense. Assumptions are as follows:493494
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%, 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 270,000 inpatient days. • The outpatient visits will actually amount to 110%, or 11,000 for the year. • The average revenue of \$400 per visit will be achieved for these 11,000 visits. • Further assume that, due to the heroic efforts of the Chief Financial Officer, the actual inpatient expenses will amount to \$11,600,000 and the actual outpatient expenses will amount to \$4,000,000.

Required
1. Set up three worksheets that follow the format of those in Example 15A. 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 line. 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.”

Assignment Exercise 15–1: Budgeting

Select an organization: either from the Case Studies in Chapters 27–28 or from one of the Mini-Case Studies in Chapters 29–31.

Required
1. Using the organization selected, create a budget for the next fiscal year. Set out the details of all assumptions you needed in order to build this budget. 2. Use the “Checklist for Building a Budget” (Exhibit 15–2) and critique your own budget.

Assignment Exercise 15–2: Budgeting

Find an existing budget from a published source. Detail should be extensive enough to present a challenge.494495

Required
1. Using the existing budget, create a new budget for the next fiscal year. Set out the details of all the assumptions you needed in order to build this budget. 2. Use the “Checklist for Building a Budget” (Exhibit 15–2) and critique your own effort. 3. Use the “Checklist for Reviewing a Budget” (Exhibit 15–3) and critique the existing budget.

Assignment Exercise 15–3: Transactions Outside the Operating Budget

Review Figure 15–2 and the accompanying text.
Metropolis Health System (MHS) has received a wellness grant from the charitable arm of an area electronics company. The grant will run for 24 months, beginning at the first of the next fiscal year. Two therapists and two registered nurses will each be spending half of their time working on the wellness grant. All four individuals are full-time employees of MHS. The electronics company has only recently begun to operate the charitable organization that awarded the grant. While they have gained all the legal approvals necessary, they have not yet provided the manuals and instructions for grant transactions that MHS usually receives when grants are awarded. Consequently, guidance about separate accounting is not yet forthcoming from the grantor.

Required

How would you handle this issue on the MHS operating budget for next year?

Assignment Exercise 15–4: Identified Versus Allocated Costs in Budgeting

Review Figure 15–3 and the accompanying text.
Metropolis Health System is preparing for a significant upgrade in both hardware and software for its information systems. As part of the project, the Chief of Information Operations (CIO) has indicated that the Information Systems (IS) department can change the format of the MHS operating budgets and related reports before the operating budget is constructed for the coming fiscal year. The Chief Financial Officer (CFO) has long wanted to modify what costs are identified and what costs are allocated (along with the method of allocation). This is a golden opportunity to do so. To gain ammunition for the change, the CFO is preparing to conduct a survey. The survey will obtain a variety of suggestions for potential changes in allocation methods for the new operating budget report formats. You have been selected as one of the employees who will be surveyed.

Required

You may choose your role for this assignment, as follows:
Refer to the “MHS Executive-Level Organization Chart” (Figure 28–2 in the MHS Case Study). (1) Either (a) choose any type of patient service that would be under the 495496direction of the Senior Vice President of Service Delivery Operations or (b) choose any other function shown on the organization chart. (Your function could be a whole department or a division or unit of that department. For example, you might choose Community Outreach or Human Resources Operations or the Emergency department, etc.) (2) Make up your own organization chart for other employee levels within the function you have chosen. (3) Now make up another chart that indicates the operating budget costs you think would be mostly identifiable for the department or unit or division you have chosen and what other operating budget costs you think would be mostly allocated to it. (You may use Figure 15–3 as a rough guide, but do not let it limit your imagination.

Example 16A: Description of Capital Expenditure Proposals Scoring System

Worthwhile Hospital has a total capital expenditure budget for next year of five million dollars. Of this amount, three million is already committed as spending for capital assets that have already been acquired and are in place. The remaining two million dollars is available for new assets and for new projects or programs.
Worthwhile Hospital typically divides the available capital expenditure funds into monies available for inpatient purposes and monies available for outpatient purposes. This year the split is proposed to be 50-50.
The hospital’s CFO is also proposing that a scoring system be used to evaluate this year’s proposals. She has set up a scoring system that allows a maximum of five points. Thus the low is a score of one point and the high is a score of five points.
In addition to the points earned by a funding proposal, the CFO will allow one “bonus point” for upgrading existing equipment and one “bonus point” for funding expansion of existing programs.

Practice Exercise 16–I: Capital Expenditure Proposals

Jody Smith, the director who supervises the Intensive Care Units, wants to secure as much of the one million dollars available for inpatient purposes as is possible for the ICU. At the same time Ted Jones, the director who supervises the Surgery Unit, also wants to secure as much of the one million dollars available for inpatient purposes as is possible for his Surgery Unit.
Given the CFO’s new scoring system, how should Jody go about choosing exactly what to request?496497

Assignment Exercise 16–1: Capital Expenditure Proposals

Ted Jones, the Surgery Unit Director, is about to choose his strategy for creating a capital expenditure funding proposal for the coming year. Ted’s unit needs more room. The Surgery Unit is running at over 90% capacity. In addition, a prominent cardiology surgeon on staff at the hospital wants to create a new cardiac surgery program that would require extensive funding for more space and for new state-of-the-art equipment. The surgeon has been campaigning with the hospital board members.

Required

What should Ted decide to ask for? How should he go about crafting a strategy to justify his request, given the hospital’s new scoring system?
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