Budgeting is regarded as a business management device that is used by various institutions in order to control their spending and maximize profitability. The budgetary analysis model analysis assists in evaluating the annual budget, which shows the planned expenditures, hence able to determine the institution’s revenue objectives. By formulating a thorough budget, department such as Radiology department, is in a better position to make critical decisions about choosing the most important expenditures and eliminating those expenditures that are not important (Palmer 2012).
Therefore, the management has to effectively apply the budgetary variation model to determine the unfavorable and favorable variances. In most cases, favorable variance might be due to the cost of the original budget exceeding the actual budget. On the other hand, unfavorable budget occurs when the cost of the actual budget is more than the cost the original budget. In some cases, unfavorable cases might be due to the revenue of the original budget exceeding that of actual budget. The analyst attempts to distinguish whether the variances were as a result of usual factors, such as variation of cost of equipment, or there were a sign of problems that would be anticipated in the upcoming months or in the future. The aim of this paper is to evaluate the performance of the Radiology department manager for a hospital.
According to Harvard Business School (2009), the variance is attained by determining the difference between the original budget and the actual budget. The favorable variance is achieved because the original procedures exceed the actual ones indicating that the planned revenue is greater than the actual one. That $120,000 - $100, 000 = $20,000
The variances in the cost and benefits could have risen due to inefficient use of resources. A good manager should be able to detect the causes in order to take effective corrective measures. The discrepancy in the procedures might have arisen due to inefficient use of the available resources. An argument can be raised that the radiology department spent so much time on some patients at the expense of the departments’ resources. A variance of $20000 is high enough to warrant an evaluation.
Having an estimated budget of 1200000, the radiology department encounters revenues that estimate to $1000000 indication an over cost of $20000. This situation can be rectified by undertaking a thorough audit and scrutiny of the records to determine the cause of discrepancy. It is upon detection of the source that the solution can be found. On the hand, the department had a strong hold in minimizing the variable cost. This is because the projected costs were $1320000 but the cost incurred was $1200000 meaning that there was a saving of $120000. The following are the probable causes of the discrepancy;
Efficient labor force
The department may have had personnel who increase productivity and efficiency of the operational costs of the department. The management should ensure that the performance is optimal by ensuring the labor supply is just enough for the purposes of efficiency. Remuneration of the workers could have also caused the discrepancy (Krishnaiah 2009). The management should design ways for a reasonable enumeration.
Cost of equipment
The reason for low variable costs can be partly due to low costs on equipment. The cost may have lowered than the expected rate thus the eradio0logy department may have saved some funds that are a proportion of the $120000.
Cost of the procedures
The procedural costs seem to have been high ion this department. This can be attributed partly to long hours taken to diagnose and treat the patients. There might have been some oversight in the time and the resources that would be consumed by each patient in the department. The manager is credited with the mandate to oversee that the necessary revisions and changes are effected top minimize the cost (Krishnaiah 2009).
We can deduce that the manger has not effectively applied the set standards in the budget. This is because the costs in both procedures. The variable costs per unit rose from the projected $11 to $12 whereas the fixed cost rose from $6 to $5. This shows that there was some element of inefficiency in the radiology department.
The budgetary variance model has assisted in going beyond a side by side contrast of the actual financial performance to the original budget. According to Bogartz (2010), he budget analyst attempts to isolate the causes of the budget variance, as well as the department activities that resulted to variation from the formulated plan. In the case of the radiology department, the analyst has prepared a narrative discussion of the basic reasons for the favorable and unfavorable variations (Palmer 2012).
This is done through reviewing the accounting entry of the radiology department.
The case of the unfavorable variance indicates that the manager in the radiology department should step down spending on marketing or evaluate a new capital expenditure that will reduce spending on the department’s information and technology to attain the operational efficiency (Bogartz 2010). Centrally, the radiology department might spend more on marketing and promotion in order to increase the sales volume or carry out business development to counter the revenue shortfall.
Bogartz, R. S. (2010). An introduction to the analysis of variance. Westport, Conn: Praeger.
Harvard Business School. (2009). Preparing a budget: Expert solutions to everyday challenges. Boston, Mass: Harvard Business Press.
Krishnaiah, P. R. (2009). Analysis of variance. Amsterdam: North-Holland Pub. Co.
Palmer , D. A. (2012). Management Reporting Budgetary Control. Financial Management Development. Retrieved from http://www.financialmanagementdevelopment.com/Slides/handouts/213.pdf