Authoritarian Budgeting} Argon County Hospital is located in the county seat. Argon County is a well-known summer

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Authoritarian Budgeting}

Argon County Hospital is located in the county seat. Argon County is a well-known summer resort area. The county population doubles during the vacation months (May to August), and hospital activity more than doubles during this time. The hospital is organized into several departments. Although it is a relatively small hospital, its pleasant surroundings have attracted a well-trained and competent medical staff.

An administrator was hired a year ago to improve the business activities of the hospital. Among the new ideas introduced is responsibility accounting. This program was announced along with quarterly cost reports to be supplied to department heads. Previously, cost data were presented to department heads infrequently. Excerpts from the announcement and the report received by the laundry supervisor are presented as follows:

The hospital has adopted a "responsibility accounting system." From now on you will receive quarterly reports comparing the costs of operating your department with budgeted costs. The reports will highlight the differences (variations) so that you can zero in on the departure from budgeted costs. (This is called "management by exception.") Responsibility accounting means you are accountable for keeping the costs in your department within the budget. The variations from the budget will help you identify which costs are out of line, and the size of the variation will indicate which ones are the most important. Your first such report accompanies this announcement.image text in transcribed

Administrator's comments: Costs are significantly above budget for the quarter. Particular attention needs to be paid to labor, supplies, and maintenance.
The annual budget for \(20 \mathrm{X} 1\) was constructed by the new administrator. Quarterly budgets were computed as one-fourth of the annual budget. The administrator compiled the budget from analysis of costs over the prior three years. The analysis showed that all costs increased each year and that the increases were more rapid between the second and third years. The administrator considered establishing the budget at an average of the prior three years' costs, hoping that the installation of the system would reduce costs to this level. However, in view of the rapidly increasing prices, 20X0 costs less 3 percent were finally chosen for the 20X1 budget. The activity level measured by patient days and pounds of laundry processed was set at \(20 \times 0\) volume, which was approximately equal to the volume of each of the past three years.
{Required:}

(a) Comment on the method used to construct the budget.

(b) What information should be communicated by variations from budgets?

(c) Does the report effectively communicate the level of efficiency of this department? Give reasons for your answer.

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