In variable budgeting, the standard cost specification is the culmination of a series of cost analyses for varying volume of output and other studies to develop reliable standards.
The depiction assumes that fixed costs will remain the same for an occupancy rate of 82 per cent or below. But in practice this may cover a range, say 75 to 85 per cent.
If it was less than 75 per cent, a different variable budget would be required, with the level of fixed cost worked out suitably for the lower occupancy volume.
If it were more than 85 per cent, another variable budget would be necessary to reflect the level of fixed costs necessitated by a larger volume of operation.
Hospital management must evaluate the advantages of variable budgeting programme before implementing the same.
To start with, management may select one department as a pilot project, keeping in mind the fact that variable budgeting is only possible if the requirements mentioned below are fulfilled.
1. A well-documented organisation structure
2. Formalised delegation of authority
3. Effective responsibility—accounting system
4. An environment conducive to participative management
5. Effective communication among all management personnel.
2. Other Control Techniques:
Apart from the budget, there are other control techniques some of which are used as a routine, the others being used in special circumstances.
Among the first, statistical data and special reports are quite common. Break-even analysis and operational audit are the two other methods.
3. Statistical Reports:
A clear presentation of statistical reports relating to the different aspects of hospital operations is important for control.
Many hospital’s operating indicators include number of admissions, patient days, outpatient service visits, department wise tests or procedures.
Statistical reports that break costs, hours, etc. down to a workload basis are easy to relate to a unit of service (say a procedure, e.g. appendectomy), a patient day, or a test, (e.g. a complete haemogram).
Other statistics that can be considered are major/ minor procedures per patient day, salary expense per procedure, consumables expenses per procedure, or total expenses per patient day.
The reports can be compared to similar reports of previous months, quarter or year.
Information presented on statistical reports should be tailored to fit the needs of the individual hospital. Most managers understand statistical data when it is presented in chart form rather than in tabular form.
Needless to add, if data are to be meaningful, they should be presented in such a way that comparison to some standards can be made.
Special reports and analyses can help in particular problem areas as and when required. Their very non routine nature can highlight the unusual and reveal opportunities for significant improvement in operations.
4. Break-even Analysis:
Break-even point analysis, an interesting control device, analyses the relationship between revenue and expenses in such a way as to show at what volume of output revenues exactly cover expenses.
At a lesser volume of output, the institution (or department) would suffer a loss; at a greater volume it would generate profit.
The use of break-even concept presupposes that all costs are classified as either fixed or variable. Break-even point analysis is generally depicted on a chart. Figure 11.2 shows a graphic representation of the break-even point.
In the example shown in the above figure, the level of revenue and expenses for each volume of output is depicted. Break-even charges are Rs. 1, 50,000/ or 10,000/- output units.
The hospital wills break-even at 10,000/- units of output at Rs. 15/- per unit. At any lesser volume, the hospital would suffer a loss, at a greater volume, it will enjoy a profit.
A break-even analysis is often confused with variable budget, because the charts look similar. The variable budget has as its purpose the control of costs, while as the break-even chart has as its purpose the prediction of profit.
This necessitates incorporating in it the revenue data. Secondly, the break-even analysis is used to determine the probability of a given course of action as compared with alternatives.
It emphasises the marginal concept, i.e. the effect of additional sales (or units of output) or costs on profit. Break-even analysis is useful in rate-setting, staffing and other market methods.
5. Operational or Internal Audit:
One more tool used in management control is operational audit, also referred to as internal audit, which are the regular appraisal of the accounting, functional and other operations of an institution.
Although mostly limited to auditing of accounts, operational auditing involves appraisal of all operations of the enterprise in general.
Thus, operational auditors also appraise policies, procedures, use of authority, quality of management, effectiveness of methods and special problems.
Although internal auditing concentrates most on accounts, and brushes up other aspects of hospital operations in passing, there is no reason why the concept of operational auditing should not be broadened in practice.
One of the limiting factors is the difficulty of obtaining people who can do such a comprehensive audit. Internal auditors must have a firm grasp on hospital administrative functions and responsibilities, to be able to assist administrators.
The second limitations is that while personnel responsible for accounts have learn to accept audit, those who are responsible for execution of plans, programmes, policies and procedures have not so readily learnt to accept the idea.
Where the auditors are conversant with hospital management essentials and the institution’s policies and plans, they have immensely assisted hospital managers by raising questions about operations which had never been raised by management because of preoccupation with routine work.
Internal auditors fulfil this function because of their professional experience and understanding of hospital administration, their independence and objectivity and ability to look across operational departments.
Internal auditors have the advantage of intimate knowledge of the organisation, the data sources, the people and the needs of decision makers.
Being part of the organisation they can move freely checking the activities without creating much notice.
When auditors programme evaluators are from outside the organisation, the external evaluator’s reputation may increase the weight given to evaluation findings.
However, in their effort to “put their best foot forward” the staff may conceal some undesirable information. The staff needs to be mentally prepared first, to accept external auditing.
The areas of the applications of operational audit cover the following:
1. Appraising the soundness and adequacy of financial and operational controls
2. Appraising compliance by the workers with the hospital’s policies and procedures.
3. Appraising the safeguarding of hospital assets.
4. Evaluating accuracy, reliability and completeness of information systems.
5. Appraising the quality of personnel and management’s performance.
Since an internal audit programme appraises elements that exist in most departments and functions, auditors review the same points across departments. A list of the control checkpoints for internal auditing covers the following.
i. Is there any organisation chart?
ii. Are authority and responsibility relationships indicated clearly?
iii. Are interdepartmental relationships clear and satisfactory?
iv. Are departmental controls existing and being used?
v. Do reports and records generated by departments meet management requirements?
7. Goals and Objectives:
i. Have clear goals and objectives been provided in writing?
ii. Are the goals and objectives understood at the operational level? Are they in harmony with those of the hospitals?
iii. Are departmental plans committed to writing and understood by all?
iv. Do the end results corroborate with goals and objectives?
8. Policies and Procedures:
i. Have policies been committed to writing and disseminated to all departments?
ii. Are they being followed in letter and spirit?
iii. Are the policies revised with changing needs?
iv. Are departmental policies in harmony with those of the hospitals?
v. Have procedures for routinised work been committed to writing?
vi. Are procedures followed correctly?
9. Staffing and Supervision:
i. Are departments staffed with adequate number of employees to handle work?
ii. Are job descriptions laid down for different positions?
iii. How good is employee morale?
iv. Is there undue absenteeism or turnover?
v. Are the workers qualified for each job?
vi. Are schemes for training and retraining of staff satisfactory?
vii. Is the work at operational level supervised adequately?
viii. Are there adequate supervisory positions?
10. Physical Facilities:
i. Are the physical facilities adequate for location, space?
ii. Is the department adequately equipped? Is equipment in working order?
iii. Does the arrangement of workers and space for patients promote efficiency of operations?
iv. Is maintenance of physical facilities and equipment adequate?