Children\'s Hospital of the King\'s Daughter in Norfolk, Virginia, introduced a

Question

Children's Hospital of the King's Daughter in Norfolk, Virginia, introduced a new budgeting method that allowed the hospital's annual plan to be updated for changes in operating plans. For example, if the budget was based on 400 patient-days and the actual count rose to 450 patient-days, the variable costs of staffing, lab work, and medication costs could be adjusted to reflect this change. The budget manager stated, "I work with hospital directors to turn data into meaningful information and effect change before the month ends."

What budgeting methods are being used under the new approach?

Why are these methods superior to the former approaches?

Explanation / Answer

Flexible budgets/Variable budgets

A variable budget is one that makes allowances for any unforeseen changes or variations in costs or revenue for the company. There are fixed costs that are considered such as rent, loan payments, etc. but some costs may change such as labour costs, production costs, etc. The income or revenue may also have fixed and variable items. Fixed revenue may be income from the rental of a section of the company building to another business, $1000. pm or income may be variable from the sale of a product.
Variable allowances are determined by a number of different formula's depending on the account. such as unit cost variations, labour cost variations, sales income variations etc.
variable budgets can also be described as flexible budgets. which allow for variations and will take a % of the known or standard costs to cover the fluctuations.
If a budget does not consider the variable costs. and they budget all funds to specific areas without any surplus to cover variable costs, they may not have enough operating capital to pay for any extra expenses that arise. which could affect the value of the companies assets.

The usefulness or importance of a flexible budget depends very much on the accuracy of the classification of expenses into fixed, semi-fixed and variable ones. The important advantages of flexible budget are as follows:

* A flexible budget enables the management to analyze the deviation of actual output from expected output.

* The management can compare actual costs at the actual volume with the budgeted costs at the actual volume.

* The flexible budget provides a correct basis for comparison between actual and expected costs for an actual activity.

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