The Laundry Department and Rivington Hospital - Essay Example

?Introduction This report analyzes the performance of the laundry department and Rivington Hospital such that the overall performance of the laundry department is analyzed. The first section of this report discusses the effects of existing budget on the behaviour of laundry supervisor followed by criteria for investigation of variances. The final part of this report analyzes the variances on the basis of actual activity level. a) Effects of Existing Budget on the Behaviour of the Laundry Supervisor The laundry supervisor may be affected by the way the budget was prepared and presented to her. The existing budget is more than enough to demoralize her. This budget may cause some serious changes in the apparent behaviour of the laundry supervisor as she is not happy and satisfied with the way she has been held responsible for every cost of the laundry department. Different kinds of behaviours can be displayed by the laundry supervisor, the details of some of them are provided below: Quality Compromise The biggest change in the behaviour of the laundry supervisor would be shown in terms of the quality that she provides. After this performance report, her aim and objective would be to cut the cost and meet the targets specified in the budgets, and in doing so, if the quality of laundry service is compromised, she would not focus on it too much. After all, the administrators are more concerned with meeting the budgets, in this way the overall quality of the department may likely be hampered by such move of the administrators. Restricting the Activity Level Since the major cause of adverse variances in the existing budget is the increase in the activity level due to which more laundry services were provided and as a result the level of costs also increased in every manner, including the excessive cost of hiring an additional worker, therefore, the laundry supervisor would try to restrict the activity level to the budget level and may not provide the laundry services to the additional activity level so that the budgeted activity level should not be crossed. In this way, the excessive cost can be reduced which occurred as a result on increasing the actual activity level. This move would surely decrease the overall activity level of the hospital but result in meeting the budgeted costs. Falsification and Misrepresentation The laundry supervisor may also use some negative tactics in order to provide a better picture to the administration by reporting the falsified and misrepresented figures of the activities of the laundry department so that budgets can be fulfilled accordingly. This step would cause the likelihood of frauds in the hospital. On a concluding note, if the administration is quite keen in getting the budgets fulfilled by the laundry department, it would have to include the laundry supervisor in budget setting activity so that a unanimous budget can be established which would surely be challenging but at the same time achievable to the laundry supervisor. b) Criterion for Variance Investigation The investigation of variance is undoubtedly an important objective of the organization such that the organization is more interested to find out the root cause of such variances. The variances may be either favorable or adverse in nature. The organization should focus on investigating both types of variances because generally the favorable variances are considered as good and they are not investigated but they have serious negative implications behind them. Managers normally try variances to be more favorable because in this way their performance would be marked high and they would be appraised on a better note. But on the other side of the picture, the favorable variances are pulled out deliberately by those managers such as hiring the low-skilled workers or even unskilled workers and purchasing the poor quality raw material etc. In this way, the favorable variances leave negative impacts and harm the overall organizational goals. The overall criteria to examine the variances should be based on the nature and type of the cost. The controllability factor is the one which can distinguish the nature of the costs as there are some costs which are controllable and some are uncontrollable. The controllable costs vary with the activity level of the organization as when the activity level increases, these costs are also increased and vice versa. Therefore, the departmental heads should be held responsible directly for any variation that comes up in respect of the controllable costs as they are the commanding authorities for these kinds of cost. On the other hand, some costs are totally uncontrollable and are presumed to be fixed costs on which the departmental heads do not have any control. In this way, if the variations occur in relation to these kinds of costs, then the departmental heads alone should not be investigated for such variances rather the administrations should also be investigated for the justification of those variances. In a nutshell, the organizations should try to frame such a mechanism in which every concerned stakeholder should participate and held responsible straight way if any variation comes under his/her domain. This is how a better system of variance investigations can be established in an organization. c) Redrafting of Memo with Recalculation of Budgets and Variances Copy of Memo: To: All department supervisors From: Hospital Administrator This memo brings into focus the evaluation of the performance of the laundry department and a performance evaluation report for the laundry department is also attached with this memo for the quarter ended 31 December, 2011. The administration of the Rivington Hospital has decided to implement a performance evaluation system based on concept of responsibility accounting which holds that the each individual or department should be held responsible for those acts on which that individual or department can exercise significant control. The structure of the performance evaluation report is framed in such a manner as the overall costs are bifurcated into two broad categories namely as Variable Cost and Fixed Cost. Budgeted estimates for both of these costs are also provided in the evaluation report. For variable costs, the budgeted estimates are kept flexible such that the actual activity level is considered as a base for evaluating the actual performance with the budgeted performance. The previously fixed budgeted activity levels are replaced by the actual activity level such that the number of patients is now kept as 8,000 instead of 6,500 and weight of laundry pressed is taken as 101,700 kg instead of 81,250 kg. The management of the Rivington Hospital has also highlighted the policy of investigation in respect of occurrence of the variances such that in case of favorable variances, the departmental heads would be rewarded at the end of the year. However, in case of adverse variances, the investigation of variance will be held as per the concept of responsibility accounting and that individual will be investigated who is actually responsible for such variance. The summarized performance of the laundry department along with the calculation of variance is given as under: 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 ===== ===== ===== ===== From the above analysis, it can be figured out that there is a variance of around 1.8% which is very much consistent with the overall routine variances. Therefore, the current variance is satisfactory in nature and, thus, should not be investigated on a larger scale. Computation of the Budgeted Variable Cost Estimates Variable costs are the ones which vary with the activity level; therefore, it would not be justified to compare the actual variable cost with the predetermined budgeted variable costs. The reason is that the actual variable costs are incurred with the actual activity level. However, the budgeted activity level is fixed and as a result, the variation in the variable cost would not provide a true picture of the performance of laundry department. For this reason, the budgeted variable cost estimates are changed according to the actual activity level. In the following, the computation and rationale of every variable cost is outlined. Cost of Wages Wages are directly associated with the level of work and the level of work increases with the increase in the number of patients. Therefore, for 8,000 patients, the cost of wages would be: (3450 ? 6500) ? 8000 = 4246 Cost of Washing Material Washing material is linked with the weight of the laundry pressed. Hence, for pressing 101,170 kg laundry, the amount required for washing material would be: (770 ? 81250) ? 101,170 = 959 Cost of Heating and Power Since the heating and power expenditure incurs mostly as a result of pressing the laundry, a significant amount of heating and power is consumed in this regard. So the appropriate basis for adjusting the budgeted cost estimates for the heating and power would be the weight of the laundry pressed. Hence, in order to press 101,170 kg laundry, the budgeted amount of heating and power would be: Conclusion A better mechanism of evaluating the performance of the departmental heads can really assist those heads in achieving the desired budgets as well as lead to motivate those heads to boost their performance. Those budgets which are prepared in collaboration with the departmental heads lead more towards their achievability as well as motivate the employees. References Seal, W., Garrison, R. & Noreen, E. (2009) Management Accounting. Berkshire: McGraw-Hill Education. Read More