The Performance Evaluation of the Laundry Department - Essay Example

? OF PAPER COLLEGE STUDIED TEACHER Table of Contents Introduction………………………………………………………………………………….. 1 Effects on the Behaviour of the Laundry Supervisor………………………………………1 Criteria for Investigation of Variances……………………………………………………...2 Redrafting of Memo…………………………………………………………………………..3 Cost of Wages……………………………………………………………………………........5 Cost of Washing Materials…………………………………………………………………...6 Heating and Power Costs…………………………………………………………………….6 Conclusion…………………………………………………………………………………….6 References…………………………………………………………………………………….7 Introduction The performance of any department can be evaluated in a number of ways, among which the fulfilment of budgets is considered vital. This report focuses on evaluating the performance of the laundry department based on revised budget estimates. The report begins by examining the effects of the existing budget on the behaviour of the laundry supervisor. After this, it outlines the different criteria for the investigation of variances, including a redrafting of the memo and revision of the existing budget, before reaching conclusions. a) Effects on the Behaviour of the Laundry Supervisor There may be various effects on the behaviour of the laundry supervisor because of the imposition of the budget. The existing budget has several negative elements that could lead to the laundry supervisor reacting and behaving in an irrational manner. First, the supervisor would undoubtedly feel demoralised because the budget was not prepared with her consent and she was not involved in drawing it up. She has not been informed of the nature of various costs, and no clear distinction is provided in the budget as to which costs are controllable and which are not. Making her responsible for every level of cost could lower her morale and performance levels. The second negative effect on the supervisor’s productivity is that the budget was prepared as if to pressurise her, rather than to motivate her, because despite the increasing volume and turnover of the hospital the budget was set in a rigid manner using the old budgeted activity levels. It is also important to note that the quality of the laundry department’s performance may be hampered from now on, as the supervisor might try to achieve the budget targets irrespective of whether quality is assured or not. Misrepresentation could also become a problem, as if her only objective is to meet the targets set out in the budget, she may attempt to fulfil them by adopting negative tactics. There are costs involved that will definitely increase because of growth in the activity level, which means the laundry supervisor will not have any control over them. Therefore, this could ultimately lead her to deploy negative tactics in the form of misrepresentation, falsification and poor quality control measures. b) Criteria for Investigation of Variances The criteria for evaluating whether variances ought to be investigated or not should be based upon the nature of the costs incurred by the different departments. The basic criterion is to divide them into controllable and uncontrollable costs. The controllable costs should be aligned with the actual activity level of the department, as they change according to variation in the activity level; therefore, they should be investigated if there is a significant amount of variation. In this way, Rivington Hospital has the choice of whether to use the absolute or relative method to investigate the negative variances. The other types of costs are uncontrollable costs, and are incurred irrespective of the level of activity. The departmental heads do not have any control over these costs, meaning the variances incurred should be investigated in such a manner that the departmental heads should not find it unfair or inequitable. Finally, the departmental heads should be involved in the basic budget preparation and variance investigation process. This would allow them to realise their level of responsibility and the organisation’s overall responsibility in cost-controlling objectives. c) Redrafting of Memo with Recalculation of Budgets and Variances Copy of Memo: To: All department supervisors From: Hospital Administrator Attached is the quarterly report for the period ended 31 December, 2011 for the laundry department. Rivington Hospital has formulated a policy of evaluating the performance of its departments based on responsibility accounting. The quarterly reports, thus, represent the performance of each department and every department will be provided with its performance evaluation report each quarter. Responsibility accounting is a measure of evaluating the performance of different departments so that every individual department is held responsible for its performance. The actual performance of the department is compared with the budgeted performance and the variances are calculated, which represent the difference between the actual and budgeted performances. However, to motivate the departmental managers, the management of the hospital has adopted a policy of formulating and setting the budgets in conjunction with the departmental heads. This will impose an additional liability on departmental heads to meet the budgets they help to set out. Another important advancement Rivington Hospital has made in the budgetary process is that budgets are formulated based on the activity level. Rather than formulating a budget on a fixed and rigid basis, the flexible budgets provide a rational basis for evaluating the performances of departments. Therefore, the variances are calculated by comparing the actual performance of the respective department with the budgeted performance based on the flexible activity level. If departments are successful in maintaining actual costs under the budgeted levels, as represented by favourable variances, they will be rewarded at the end of the year. However, where departments are unsuccessful in maintaining budgets, and more than 5% variation is found in their performance, the respective departmental heads will be called upon to provide reasonable explanations and possible corrective actions and recommendations in this regard. The existing performance report has been broadly adjusted in two ways. First, the total cost is split into categories of fixed and variable costs, such that variable costs change with variations in the activity level whereas fixed costs remain constant within a particular range of activity. Second, the budgeted activity level is not considered the basis for measuring the performance of the department. Rather, the actual activity level is used to evaluate the performance. The past practice was to measure the performance based on the budgeted activity level of 6,500 patients and around 81,250 kg of laundry pressed. However, the actual activity level showed that around 8,000 patients were taken care of and around 101,700 kg of laundry was pressed. Due to these increases, the overall costs of the laundry department changed, especially the variable costs directly associated with changes in the activity level. Standard rate Actual Budget based on actual activity level Variation Variation %age F/ U Variable overhead costs: ? ? ? % Wages ?0.53 per patient day 4125 4246 121 2.8 F Washing materials ?0.0095 per kg 920 959 39 4.0 F Heating and power ?0.0063 per kg 560 635 75 11.8 F Equipment maintenance ?9 per 16250 kgs 10 54 44 81.5 F ---------- ---------- ---------- ---------- Total variable overhead cost 5615 5894 279 4.7 F ===== ===== ===== ===== Fixed overhead costs: Equipment depreciation 250 250 0 0 - Allocated administration costs 2460 2000 (460) (23) U Supervisor salary 1490 1495 5 0 U ---------- ---------- ---------- ---------- Total fixed overhead cost 4200 3745 (455) (12.15) U ---------- ---------- ---------- ---------- Total overhead cost 9815 9639 (176) (1.8) U ===== ===== ===== ===== Since the overall fixed costs remain the same irrespective of the activity level, their budgeted activity levels are not changed. However, the variable costs change with the activity level, meaning the budgeted activity level is altered to provide a better and appropriate yardstick to compare the actual variable cost with the true and appropriate budgeted cost. The changes in the budgeted variable costs, along with their appropriate basis, are discussed below. Cost of Wages The cost of wages is adjusted due to an increase in the workload that required hiring an additional worker. The appropriate basis for this cost would be the number of patients taken care of in a particular period. As the number of patients increases the workload increases, meaning the cost of wages will also increase accordingly. Here is the computation of the adjusted budgeted cost of wages: (3450 ? 6500) ? 8000 = 4246 Cost of Washing Materials The cost of washing materials is directly related to the quantity of laundry pressed. Since there is a considerable increase in the actual quantity of laundry pressed, the cost of washing materials is adjusted on this basis. Here is the computation of the adjusted budgeted cost of washing materials: (770 ? 81250) ? 101,170 = 959 Heating and Power Costs The heating and power costs are also directly linked to the quantity of laundry pressed. As the amount of laundry pressed increases, more heating and power are consumed. Here are the computations for the adjusted budgeted cost of the heating and power based on the actual quantity of laundry pressed: (510 ? 81250) ? 101,170 = 635 Conclusion Any budget framed and developed with the participation of the departmental heads becomes more achievable and contributes to motivating them to perform better and achieve targets. When the departmental heads are involved in the budget preparation process, they feel the additional liability of meeting the budget aims as they were approved with their consent. Resultantly, they strive hard to fulfil the budgets and earn the associated rewards. References Seal, W., Garrison, R. & Noreen, E. (2009). Management Accounting. Berkshire: McGraw-Hill Education. Read More