Introduction: Budgeting is an important aspect of any business whereby the management coordinates the various activities for the upcoming financial years using detailed plans of actions. The budgeting process involves establishing the objectives or goals of the company initially. This is followed by identifying potential strategies that can be applied to achieve these objectives. These various options are then evaluated in the next stage and a course of action is finalized. This course of action is then implemented with importance to the long term plans of the organization.
Finally, the operations during the year are monitored and any discrepancies in the budgeted and actual outcomes are identified (Clayman, Fridson, & Troughton, 2008). These budgets are useful in a number of ways. They assist in planning the annual operations, providing a holistic view of the organization and how each department should contribute to achieve the overall organizational goals. Moreover, they also act as tools to communicate the responsibilities of the employees and managers and motivating them to achieve the desired results. By evaluating the outcomes, the performance of the various departments and the employees can be effectively monitored (Gapenski, 2007).
Expense Results and Reasons for Variances: As discussed earlier, budgets provide the base for measuring the performance of various departments. By comparing the budgeted values with that of the actual results achieved, the management will be able to pin point areas that require improvement and optimization. It is essential that the reasons for these variances are identified so that corrective measures can be taken to avoid such variances in the future (Clayman, Fridson, & Troughton, 2008).
In this section, five expense results with budget expectations are considered and the possible reasons for their variances are also analyzed. 1. Personnel Costs: Budgeted labor costs were $ 100,000 but the actual labor costs amounted to $ 107,000. There is a total labor variance of $ 7,000 in this case. There can be a number of reasons for this variance. The budgeted costs may be based on a particular mix of skill sets of the employees. However, it is possible that more highly skilled personnel were employed during the year resulting in a slightly higher expense.
The variance could have also been caused by a temporary shortage of labor in the local market thereby pushing the rates for a particular period. In case of shortage of labor supply, it is possible that fewer people were working longer hours demanding higher overtime pays. This could have caused the expense to rise. The management can avoid this variance in future budgets by forecasting the proper mix of skill sets required and the labor rates that are more likely to be incurred in the following year. 2.
Expenses on Supplies: Budgeted expenses on supplies were $ 60,000 but the actual expenses incurred were only $ 50,000. This could have been caused by the drop of market prices of the supplies. The management’s decision to buy sub standard supplies during the fiscal year can also cause this variance. Another common reason for this favorable variance in supply costs may be the supplier offering the materials at a lower cost via a promotional campaign.
These are the possible reasons for the variances in the expenses on supplies. These variances can be avoided by maintaining a strong relationship with the supplier so that the management can communicate effectively with them and consider the prices changes before making the budget. Also, the quality of the supplies used should be finalized while making the budget and no compromises should be made thereafter. 3. Maintenance Expenses: Budgeted expenses on maintenance were $ 50,000 whereas the actual maintenance costs incurred were only $ 40,000.
The maintenance costs are budgeted based on previous year’s expenses and hence are not always accurate. The machinery and the equipment used in the organization may not have required higher maintenance costs especially if they were purchased within a short period. These variances can be minimized by inspecting the machinery and its service history before the forecast is made to enable accurate estimates. 4. Patient Days The expenses in a healthcare facility based on the patient days were budgeted to be $ 200,000 whereas the actual expenses were $ 220,000. The estimates of patient days are usually made based on previous history at the health care facility (Baker & Baker, 2009).
However, it is very normal to notice that the actual patient days may vary drastically when compared to that of the budgeted value, especially if the facility includes an emergency care unit. It will be better to make monthly estimates rather than for the whole year to consider seasonal variations. This can help reduce the variance in the costs. 5. Procedure Expenses The treatment expenses at a health care facility were estimated to be $ 500,000 but the actual expenses recorded were $ 520,000.
Again, the estimates may be based on historical data. Moreover the expenses related to the procedure could have increased due to increase in the cost of the accessories utilized and the general medicinal kits used during the procedure. The variance could have also been caused by the wastage of materials and others during procedures indicating that the processes need to be optimized and the personnel need to trained more to avoid wastage in an effective manner (Cleverley & Cameron, 2006).
Benchmarking Techniques The benchmarking techniques assist the management to improve the accuracy of the budgets in the future forecasts. The three benchmarking techniques recommended to improve the budget accuracy are internal benchmarking, engineered benchmarking and comparative group productivity. Internal benchmarking involves analyzing various levels of performance within the organization and identifying the best practices in each section. These best practices are then disseminated to other parts of the organization. It usually involves identifying the best performing section and extrapolating its performance levels to the various other sections.
This enables the management to bring up the performance levels internally within the organization. The internal benchmarking has many advantages over other techniques. The main advantage is that it is cost effective and all the information required for benchmarking are easily available within the organization (Clayman, Fridson, & Troughton, 2008). Engineered benchmarking, as the name suggests, is based on the ideal performance levels expected from an organization. It is the combination of the best performances of the various sections and thus reflects the best performance level in the industry.
It is sometimes referred to as the model company approach. The engineered benchmarking avoids considering a single company as the ideal performance indicator whereas it identifies an optimal level of performance and efficiency with which the company can be compared. Comparative group productivity is based on identifying the group productivity average and comparing it with that of the company. It is established mainly through inter firm communication channels to adapt best practices across the organization (Clayman, Fridson, & Troughton, 2008). The best suited benchmarking technique is the internal benchmarking as it is simpler and all the information is readily available.
In some cases engineered approach will be more effective when the performance of the other companies in the same industry can be easily assessed. Conclusion It is evident that budgeting and control is an important process in an organization. It is a continuous process where the budgets are improved every year based on the previous year’s results. The benchmarking techniques were also analyzed to identify the techniques that will help improve the accuracy of the budgeting process.
References Baker, J. J., & Baker, R. (2009). Health Care Finance: Basic Tools for Nonfinancial Managers (Health Care Finance (Baker)). Jones & Bartlett Publishers. Clayman, M. R., Fridson, M. S., & Troughton, G. H. (2008). Corporate Finance: A Practical Approach (Cfa Institute Investment). Wiley. Cleverley, W. O., & Cameron, A. E. (2006). Essentials of Health Care Finance. Jones & Bartlett Publishers. Gapenski, L. C. (2007). Healthcare Finance: An Introduction to Accounting and Financial Management. Health Administration Press.