Example 16A: Budgeting

A static budget is based on a single level of operations, which is never adjusted. Therefore the static budgeted expense amounts will not change even though actual volume does change during the year.

The computation of a static budget variance only requires one calculation, as follows:

Actual Results minus Static Budget Amount equals Static Budget Variance

We can set up the example in the chapter text in this format as follows.

Use patient days as an example of level of volume, or output. Assume that the budget anticipated 4,000 patient days this year at an average of $600 revenue per day, or $2,400,000. Further assume that expenses were budgeted at $560 per patient day, or $22,400,000. The budget would look like this:

	As Budgeted
Revenue	$24,000,000
Expenses	22,400,000
Excess of Revenue over Expenses	$1,600,000

Now assume that only 3,600, or 90 percent, of the patient days are going to actually be achieved for the year. The average revenue of $600 per day will be achieved for these 3,600 days (thus 3,600 times 600 equals 216,000,000). Further assume that, despite the best efforts of the Chief Financial Officer, the expenses will amount to $22,000,000. The actual results would look like this:

	Actual
Revenue	$21,600,000
Expenses	22,000,000
Excess of Expenses over Revenue	(400,000)

The budgeted revenue and expenses still reflect the original expectation of 4,000 patient days; the budget report would look like this:

	Actual	Budget	Static Budget Variance
Revenue	21,600,000	$24,000,000	$(2,400,000)
Expenses	22,000,000	22,400,000	(400,000)
Excess of Expenses over Revenue	(400,000)	$ 1,600,000	$(2,000,000)

Note: The negative actual result of (400,000) combined with the positive budget expectation of 1,600,000 amounts to the negative net variance of (2,000,000).

This example has shown a static budget, geared toward only one level of activity and remaining constant or static.

Now it's Your Turn: Practice Exercise 161: Budgeting

Budget assumptions for this exercise include both inpatient and outpatient revenue and expense. Assumptions are as follows:

As to the initial budget:

The budget anticipated 30,000 inpatient days this year at an average of $650 revenue per day.

Inpatient expenses were budgeted at $600 per patient day.

The budget anticipated 10,000 outpatient visits this year at an average of $400 revenue per visit.

Outpatient expenses were budgeted at $380 per visit.

As to the actual results:

Assume that only 27,000, or 90 percent, of the inpatient days are going to actually be achieved for the year.

The average revenue of $650 per day will be achieved for these 27,000 inpatient days.

The outpatient visits will actually amount to 110 percent, or 11,000 for the year.

The average revenue of $400 per visit will be achieved for these 1,100 visits.

Further assume that, due to the heroic efforts of the Chief Financial Officer, the actual inpatient expenses will amount to $16,100,000 and the actual outpatient expenses will amount to $4,000,000.

Required

Set up three worksheets that follow the format of those in Example 16A above. However, in each of your worksheets make two lines for Revenue; label one as RevenueInpatient and the other RevenueOutpatient. Add a Revenue Subtotal line. Likewise, make two lines for Expense; label one as ExpenseInpatient and the other ExpenseOutpatient. Add an Expense Subtotal line.

Using the new assumptions, complete the first worksheet for As Budgeted.

Using the new assumptions, complete the second worksheet for Actual.

Using the new assumptions, complete the third worksheet for Static Budget Variance.