PLAINNING AND BUDGETING 2
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Program Learning Outcomes and Assessment–Spring 2021Course:FIN3402 Financial
Chapter 6 Assignment -Planning and Budgeting: For this assignment, please compose a paragraph-length response (generally five sentences) to each of the below seven items. These responses must be in your own words and not copied from the textbook or any other source. Your written submission should contain seven sections, numbered “1” through “7” as described below. Each of your seven numbered sections is to be written in paragraph form, double-spaced, in 12-point font, and with complete sentences (and without lists, bullet points, or errors related to spelling/grammar/writing/punctuation, etc.). Each of your seven numbered sections should flow like an independent essay. The written content component of this assignment is worth 28 points, as detailed below. Up to 7points may be deducted for spelling/punctuation/grammar/sentence structure/references/citations errors.
1.Please describe the purpose and the various components of the operating budget. [4 points]
2.Please define volume forecasting and explain how it affects other items in the operating budget. [4 points]
3.Please describe at least four factors that are considered when volume forecasts are being developed. [4 points]
4.Please explain what is meant by variance analysis in health care finance. [4 points]
5.How is variance analysis used by departmental or clinic managers? [4 points]
6.Define and explain the relationship between simple variance analysis and flexible variance analysis. [4 points]
7.What is the advantage of flexible variance analysis compared to simple variance analysis? [4 points]
Santa Fe College
- Purpose and components of the operating budget
The main purpose of the operating budget is to describe activities that enable businesses in generating income. It helps businesses in the planning process e.g., how much revenue the business expects to generate, what should be the margin on revenue generated, what should be the cost directly related to the revenue-generating (Wedyan et al., 2017). The end result of the operating budget is the operating profit margin. It enables businesses in managing current expenses and forecasting future expenses, reducing business debts, and enhancing financial accountability. The main components of the operating budget are sales, production, direct materials, and direct labor, manufacturing overheads, general expenses, and administrative expenses.
- Volume forecasting & how it affects other items in the operating budget
Volume forecasting can be also called production planning, like predicting future revenue of businesses for a number of future periods, planning costs associated with generating revenue e.g., costs of materials associated, conversion costs like direct labor and manufacturing overheads, and general and administrative expenses. Volume forecasting enables businesses to predict the future ups and downs in costs associated with production and revenue with changes in the volume of production and revenue (Tilanus & Theeuwes, 1976). Volume forecasting helps businesses in controlling production volume. It helps businesses to make sure the required number of resources are available for generating a certain volume of sales, and for achieving a certain amount of production level. Volume forecasting is directly related to the operating budget, the budgeted revenue and production can be achieved by forecasting the volume of required resources for achieving forecasted revenue and production.
- Four factors that are considered when volume forecasts are being developed
· Production is carried out as per the current level of sale and expected growth in the future. However, there could be variation in actual sales figures and more production might be required in order to achieve such a level of sales (Makridakis et al., 2020). The volume of resources might not be sufficient to deal with such unexpected growth in sales.
· The weather conditions must be considered while forecasting volume. Unfavorable weather conditions might affect the volume forecasted.
· The human resources required should be accurately considered. Variation in the required number and the actual number of the human resources might affect the results of volume forecast adversely (Wedyan et al., 2017).
· Unexpected situations like mishandling and damages due to poor storage practices must be considered while forecasting volume.
- Please explain what is meant by variance analysis in health care finance.
In health care finance variance analysis mean variations between budgeted and actual costs and charges of health care resources and services (Tilanus & Theeuwes, 1976). It identifies differences in budgeted expenditure and actual expenditure of the health care industry in the production of health care equipment and delivery of health care services.
- How is variance analysis used by departmental or clinic managers?
Departmental managers use variance analysis by comparing budgeted costs and charges of health care items and services with actual costs and charges of health care items and services. This comparison identifies variation between budgeted and actual figures (Krylov, 2018). It enables departmental managers to identify variations and take necessary steps to reduce the gap between actual and budgeted figures.
- Define and explain the relationship between simple and flexible variance analysis:
A flexible budget is amendable and is recast able with the actual results. However, on the other hand, a simple budget does not change with the actual volume of output. Variance analysis between fixed budgeted output versus actual output is called simple variance analysis. Variance analysis between flexible budgeted output versus actual output is called flexible variance analysis (Hyett et al., 2007). There are little to no variations exists in the case of simple variance analysis, while in the case of flexible variance analysis, more variations can be identified as compared to fixed budget variance analysis.
- Advantages of flexible variance analysis compared to simple variance analysis:
· It helps businesses to keep themselves updated with the current data of costs, expenditures, and revenues (Finkler, 1985).
· It helps businesses identifying more variations between budgeted and actual expenditures and incomes (Finkler, 1985).
· It helps businesses in cost control. For example, a reduction in revenue will result in a reduction in cost associated with revenue at almost the same percentage.
Finkler, S. (1985). Flexible budget variance analysis extended to patient acuity and DRGs. Health Care Management Review, 10(4), 21-34. https://doi.org/10.1097/00004010-198501040-00004
Hyett, K., Podosky, M., Santamaria, N., & Ham, J. (2007). Valuing variance: the importance of variance analysis in clinical pathways utilization. Australian Health Review, 31(4), 565. https://doi.org/10.1071/ah070565
Krylov, S. (2018). Target financial forecasting as an instrument to improve company financial health. Cogent Business & Management, 5(1), 1540074. https://doi.org/10.1080/23311975.2018.1540074
Makridakis, S., Hyndman, R., & Petropoulos, F. (2020). Forecasting in social settings: The state of the art. International Journal of Forecasting, 36(1), 15-28. https://doi.org/10.1016/j.ijforecast.2019.05.011
Tilanus, C., & Theeuwes, J. (1976). Variance analysis, flexible budgeting and responsibility accounting. Quantitative Methods in Budgeting, 147-158. https://doi.org/10.1007/978-1-4613-4373-8_8
Wedyan, L., Jaradat, M., & Bshayreh, M. (2017). The Importance of Operating Budgets in Estimating the Revenues and Expenses in the Industrial Companies Operated in the Aqaba Special Economic Zone Authority. International Journal of Accounting and Financial Reporting, 6(2). https://doi.org/10.5296/ijafr.v6i2.10360
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