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Program Learning Outcomes and Assessment – Spring 2021

Course: FIN 3402 Financial Management

Program Learning Outcome: Demonstrate knowledge of financial concepts.

Material: Chapter 6 – Planning and Budgeting

Assessment Tool: Written Assignment (33 points)

Students are required to earn a passing grade (70% or better) on this assignment.

Any student who does not earn a score of 70% or better on this assignment will be

required to repeat the course.

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 7 points 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]

Page 2 of 3

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]

This assignment is worth a total of 33 points as follows, and there are two required
deliverables for this assessment:

• You must send your complete first draft of this assignment to either Santa Fe Writing
Tutoring or Smartthinking for these tutors to review and provide recommended
improvements. (You are welcome and encouraged to utilize the services of both of these
resources, but only one is required.)

As part of your grade for this assignment, you are then required to submit, via uploading
into Canvas, a) documented proof that you have had the written content of your assignment
reviewed by either Santa Fe Writing Tutoring or Smartthinking, and b) the complete first
draft of this assignment that you sent to the tutors for review.

Points = 5
Due Date = March 8, 2021, 11:59 p.m.

• You are required to submit, via uploading into Canvas, the final revised version of the
written content of your assignment.

Points = 28 (Up to 7 points may be deducted for writing/formatting errors.)
Due Date = March 21, 2021, 11:59 p.m.

Very Important Information Regarding This Assignment:

As you will recall, the following language is included in the Expectations for Students in
HSA Courses document and the Course Syllabus, both of which were provided to you in
the Week 1 Canvas module for this class:

The Business Programs Department is now part of the Accreditation Council for
Business Schools and Programs (ACBSP). As part of the accreditation process,
each core Business Programs course has been assigned a program learning
outcome (PLO), along with a specific assignment to measure whether students
have met the program learning outcome. Students are required to earn a passing
grade (70% or better) on the designated PLO assignment for each course. Any
student who does not earn a score of 70% or better on the PLO assignment will be
required to repeat the course.

Page 3 of 3

Since earning a score of 70% or better on this assignment is required in order to pass
this course, you have been given extra time for completion. You are, however, strongly
advised to use this time wisely and not wait until the last minute to complete this work.

PLAINNING AND BUDGETING 2

Hi Angelly,

As you will recall, the Chapter 6 Assignment for FIN 3402 is the Program Learning Outcome (PLO) Assessment for this course. As stated in the course syllabus provided during the first week of the semester and also in the assignment description, “Any student who does not earn a score of 70% or better on the PLO assignment will be required to repeat the course.”

Part 2 of your assignment has been graded, and you earned 14/28 points. You earned full points on Sections 1 and 2. You earned partial points on Sections 4, 5, and 6. You earned zero points on Sections 3 and 7. Two points were deducted for writing/formatting issues. When we include the 5 points you earned for submitting proof of Smarthinking review by the due date (Part 1), you earned a score of 57% on the overall PLO Assignment. Based on this score, you have failed this course.

I am going to give you a one-time opportunity to rewrite your paper in order to be regraded.

Should you wish to take advantage of this opportunity, you will need to completely rewrite Sections 3 and 7 of this assignment, and you will need to revise sections 4, 5, and 6 to effectuate improvement. The Santa Fe Learning Commons tutors may be helpful to you regarding writing errors. Your responses should clearly demonstrate your understanding of the material within the text, and they should be written in your own words and not copied from the book. All the information required to correctly complete this assignment is contained within Chapter 6 of the textbook. Please go back and carefully reread the assignment instructions. Use of lists and bullet points are strictly prohibited.

You will have until Friday, April 30, 11:59 p.m. to resubmit your revised assignment via the “Dropbox: Chapter 6 Assignment – Program Learning Outcome Assignment – PART 2 OF 2” within the Week 11 Canvas course module.

Please let me know if you have any questions regarding the above.

Thank you,

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]

Angelly Chala

Santa Fe College

FIN3402

4/29/2021

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

References

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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CHAPTER 6
Pl

nning and

Budget

ing
The planning process

Budget

decisions
Budget types
Operating budget example
Flexible budgeting and variance analysis
Copyright ©

3 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

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The Planning Process

The strategic plan is the foundation of the planning process

It contains the:
Mission statement
Values statement
Vision statement
Goals
Objectives
The operating

or five-year, plan is the “how we expect to meet our objectives” portion of the planning process.
The planning process takes place more or less continuously throughout the year.
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

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Operating

(

-Year

)

Plan Format

Chapter 1: Mission, values, vision, and goals
Chapter 2: Corporate objectives
Chapter

: Functional area plans

Marketing

Operations

Finance
D. Administration and human resources
E. Facilit

ies

Note that the plan is most detailed for the first year.
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

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Financial Plan Format

C. Finance
1. Current financial condition analysis
2. Capital investments and financing
a. Capital budget
b. Financing plan
3. Financial operations
a. Overall policy
b. Cash budget
c. Cash and marketable securities management
d. Inventory management
e. Revenue cycle management
f. Short-term financing
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

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Financial Plan Format

(

Cont.)

. Budgeting and control (first year only)
a. Revenue budget
b. Expense budget
c. Operating budget
d. Control procedures

Future financial condition analysis
What are the keys to an effective planning process?
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

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Budgeting Basics
Budgets are detailed plans, expressed in dollar terms, that specify how resources will be used over some period of time.
Budgets may be developed and applied to any level within an organization:
Aggregate
By department
By service line
By contract
By the nature of the expenditure
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

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Budgeting Basics (Cont.)
To be effective, budgets must not be thought of as financial staff tools, but rather as managerial tools.
Budgets are used for:
Planning
Communication
Control
There are three decisions that must be made regarding a business’s budgeting process. (See next 3 slides.)
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

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Conventional vs. Zero-Based Budgets
Traditionally, health providers have used the conventional approach to budgeting.
The old budget is the starting point.
Typically, only minor changes are made.
Changes often are applied equally.
In zero-based budgeting, each new budget is started from scratch.
What are the advantages and disadvantages of each approach?
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

6 – *

Budget Timing
All organizations use annual budgets to set standards for the coming year.
Most also use quarterly (or more frequent) budgets to ensure timely feedback and control.
Not all budget types have to follow the same timing pattern.
Out-year budgets are more for planning than for control purposes.
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

6 – *

Top-Down vs. Bottom-Up Budgets
Top-down budgets:
Begin at the finance department with senior management guidance.
Are sent to the departments for review.
Bottom-up budgets:
Begin at sub-unit (departmental) level.
Are reviewed and compiled by the finance department.
Are approved by senior management.
What are the advantages and disadvantages of each?
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

6 – *

Revenue Budget
Most businesses have a:
Revenue budget
Expense budget
Operating budget
The revenue budget uses volume and payment data to forecast

revenues

.
The end result is a revenue forecast:
In the aggregate
By department
By service
By diagnosis (or other clinical basis)
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

6 – *

Expense Budget
The expense budget combines volume data with detailed resource utilization data to forecast expenses.
To be most useful, expenses must be broken down into fixed and variable components.
Like revenues, expenses must be forecasted at multiple levels.
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

6 – *

Operating Budget
For larger organizations, the operating budget, which focuses on projected profitability, combines information from the revenue and expense budgets.
Smaller organizations may use a single operating budget in place of multiple budget types.
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

6 – *

Operating Budget Illustration
Consider the 2012 operating budget of Carroll Clinic shown on the following four slides. This budget was created at the end of 20

.
The budget is divided into four parts:
Volume assumptions
Revenue assumptions
Cost assumptions
Pro forma P&L statement
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

6 – *

2012 Operating Budget (Parts I and II)

I. Volume (Nu

mber of Visits

)
A.

Payer A

0
B.

Payer B

Total

,000

II. Reimbursement (Average Payment Per Visit)
A. Payer A

100
B. Payer B $ 90
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

6 – *

2012 Operating Budget (Part III)

III. Costs

A. Variable Costs:

Suppl

ies

315,000

B. Fixed Costs:

Labor

,000

Overhead

,000

Total

$1,535,000

6 – *

2012 Operating Budget (Part IV)

IV.

Pro Forma

P&L Statement

Revenues:

Payer A

$ 90

0,000

Payer B

1,0

80,000

Total revenues

$1,980,000

Variable

costs

$ 315,000

Fixed costs

1,535,000

Total costs

,85

0,000

Projected profit

$ 130,000

6 – *

Variance

Analysis
A variance is the difference between actual results and the budgeted (standard) value.
Variance analysis is a technique applied to budget data to:
Identify problem areas
Enhance control
Why is variance analysis so useful to health services managers?
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

6 – *

Simple

Variance

Analysis Example
To illustrate variance analysis, we will use Carroll Clinic’s forecasted 2012 budget presented in Slides 15-17 as the simple (original) budget.
Assume it is now January 2013, and the operating results for 2012 have been compiled. These actual (realized) results are shown on the next slide along with a simple variance analysis.
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

6 – *

2012

Results

(Parts I, II, and III)
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

6 – *

2012 Results (Part IV)
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

6 – *

Simple Variance Analysis Interpretation

Profit

ability was

,500

(17.3

) below standard.
Revenues were $

47,500

(

%) greater than expected.
Costs were $

70,000

(3.8%) greater than expected.
Higher revenues were due to Payer A, which had both higher than expected volume and reimbursement.
Costs were higher across the board.
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

6 – *

Flexible Variance Analysis
The variance analysis just performed is a simple analysis in that it compares actual results with initial (beginning of year) assumptions.
We can glean additional information by constructing a flexible budget, which is based on all initial budget assumptions but then adjusted (flexed) to reflect actual (realized) volume.
Now, the variances will reflect financial performance differences other than those that stem from volume forecast errors.
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

6 – *

2012 Results (Parts I, II, and III)
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

6 – *

2012 Results (Part IV)
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

6 – *

Flexible Variance Analysis Interpretation
Profitability was $70,000 (

.4%) below standard.
Revenues were $7,500

.4%) less than expected.
But costs were $

,500 (3.4%) greater than expected.
When volume is considered, both revenues and costs were less than expected.
Management needs to work on:
Increasing reimbursement rates (especially with Payer B).
Controlling costs.
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

6 – *

Variance Analysis Example Recap
Variance analysis in practice typically is much more detailed than presented in this illustration.
Also, variance analysis is applied to operating data such as census, labor hours, number of outpatient visits, and so on, often on a weekly (or even daily) basis.
Now, however, you have the picture of what it’s all about.
Is all this work worth it?
Copyright © 2013 by the Foundation of the American College of Healthcare Executives
Copyright © 2013 by the Foundation of the American College of Healthcare Executives

Simple

Actual

Variance

Budget

Results

Dollar

(Visit)

Percentage

I. Volume (Number of Visits
)

Payer A

9,000 10,000

1,000

11.1

Payer B

12,000

1
1
,
5
00

(500

)

(4.2)

Total

21,000

21
,500

500

2.4

II. Reimbursement (Per Visit)

Payer A

$100 $105

5.
0
%

Payer B

$ 90 $ 85

(5.6)

III. Costs

A. Variable Costs:

Suppl
ies

315,000 $

320,000

5,000)

(

1.6%)

B. Fixed Costs:

Labor

$1,035,000 $1,050,000

($15,000)

(1.4)

Overhead

500,000

550,000

(

50
,000
)

(10.0)

Total

$1,535,000

$1,600,000

(

$65,0

00
)

(4.2)

IV.

Forecasted

P&L Statement

Simple

Actual

Variance

Budget

Results

Dollar
(Visit)

Percentage

Revenues:

Payer A

$ 900,000 $1,050,000

$ 150,000

16.7%

Payer B

1,080,000

977,500

(102,500

)

(9.5)

Total

revenues

$1,980,000

$2,027,500

47,500

2.4

Variable costs

$ 315,000 $ 320,000

5,000)

(1.6)

Fixed costs

1,535,000

1,600,000

(65,000

)

(4.2)

Total
costs

$1,850,000

$1,920,000

(
$

70,000
)

(3.

Profit

$ 130,000

$ 107,500

(
$

22,500

)

(17.3)

Flexible

Actual

Variance

Budget

Results

Dollar
(Visit)

Percentage

I. Volume (Nu

mber of Visits)

Payer A

10,000 10,000

Payer B

11
,
5
00

Total

21,5

21,500

II. Reimbursement (Per Visit)

Payer A

$100 $105

0
%

Payer B

$ 90 $ 85

($5)

(5.6)

III. Costs

A. Variable Costs:

Supplies

$ 322,500 $ 320,000

$ 2,500

0.8

B. Fixed Costs:

Labor

$1,035,000 $1,050,000

($15,000

)

(1.4)

Overhead

500,000

550,000

(

5
0,000
)

(10.0)

Total
$1,535,000

$1,600,000

(

$65,000

)

(4.2)

IV.
Forecasted
P&L Statement

Flexible

Actual

Variance

Budget

Results

Dollar
(Visit)

Percentage

Revenues:

Payer A

$1,000,000 $1,050,000

$ 50,000

5.0%

Payer B

1,0
35
,000

977,500

(57,500

)

(5.6)

Total

revenues

$2
,0
35
,000

$2,027,500

(

7,500

)

(0
.4
)

Variable costs

$ 322,500 $ 320,000

$
2
,
5
00

0.8

Fixed costs

1,535,000

1,600,000

(65,000
)

(4.2)

Total
costs

$1
,85
7
,
5
00

$1,920,000

(
$
62
,
5
00
)

(3.
4
)

Profit

$ 177

,
5
00

$ 107,500

(
$

,
0
00
)

(
39
.
4
)