Management Accounting Tools in Hospitals and Universities - Essay Example

Management accounting tools and techniques in hospitals and universities A variety of tools and techniques have been used in analyzing the management accounting in hospitals and universities. Most involve the comparison of actual costs incurred within a given period of time with some level of accounting deemed to be an appropriate standard for comparison. These tools and techniques may be derived in various different means. One micro-level approach normally uses industrial engineering readings of the basic tasks that are involved in developing standard times and cost for each task factor. This paper gives an overview and discussion of the use of management accounting (SMA) tools and techniques in hospitals under the competitive market environments. Cost Variance Analysis The total real costs are then compared with the total standard costs indorsed for the activity level that prevail during the same period. Macdonald and Reuter used this approach to establish cost obstetrical services in Johns Hopkins Hospital (Dyson; Abdel-Kader 223). They demonstrated how a detailed costing involving medical staff activities could offer a more meaningful base than the traditional actual costs listing for evaluating the total expenses incurred in operating delivery suite. Another alternative is the statistical regression analysis to create a cost function whereby total costs are exhibited as an explanatory variable(s) function. An example of statistical regression approach is the by Lave and Lave study in which they evaluated the effects of variables such as the hospital size, hospital services utilization, and an inflationary effect in relation to time on the expenses of a group of hospitals in Pennsylvania (Dyson 449). A third possibility is comparing organizations’ costs to other costs incurred by similar organizations over the same period of time. This technique underlies reporting services such as that provided by hospitals and universities administration services. An alternative approach to organizations’ cost analysis which has more modest data obligations has been developed by many managerial cost accountants. Even though most of the discussion in accounting literature has been industrial applications oriented, the technique itself is quite common and can be applied in a wide variety of businesses and types of organizations such as hospital and universities. Variance analysis This technique is often in accounting referred to as variance analysis. The technique is not, however, connected to the statistical variance procedure analysis. In accounting application, the term "variance" simply means the difference between two quantities. This basic accounting technique is defined in most managerial accounting and standard cost texts. Variance analysis embroils two essential steps: the design of an appropriate cost model in form of a definitional relationship, or identity; and the decomposition of change, or difference, between the two cost totals into separate cost changes set, or variances, one for every individual factors or components in the initial total cost model. This approach has been very useful in a variety of managerial accounting situations as an initial display to identify fields in which a more comprehensive study would be helpful. However, the analysis does not provide evidence on why the factors in initial cost model change. Its use is not too much explanatory as descriptive. Cash Flow Analysis Cash flow analysis helps hospitals and universities’ management to evaluate the organization ability to generate finances from activities. It also shows sources of the projects in which the organization invests finances. Cash flow analysis usually recounts to cash flows from the operating activities, institutional cash flows from investing accomplishments and cash flows from general financing activities. Cash flows from operating accomplishments include vendor payments, other administrative and salaries expenses. Cash flows from investing accomplishments relate to investments that an organization makes during a certain period of term (Dyson 96). Cash flows from the organizations’ financing activities indicate funding transactions such as bond and stock sales on securities exchanges. Cash flow analysis tool is very important to hospital and university institutions, since they both have a steady cash in and cash out transactions for effective administration. The cash flow statement enables these institutions to track flows in and out of cash and reveals the reasons of cash flow surpluses and shortfalls. The operating activities include the daily occurrences that are crucial to any institutional operation. The increase or decrease in cash figure in the cash flow statement indicates the net results of operating, investing and fiscal activities. If a organization ever runs out of cash, then it cannot survive, therefore, this is a vital number. Cash flow tool can not only be used to analyze the sources and cash uses from financial year to financial year but also in monthly basis if the organization set up in their accounting system to generate monthly statements. Cash flow statement is an invaluable tool for understanding the ‘whys’ and ‘hows’ of cash flowing in and out of the organization. Throughput Accounting Throughput Accounting concentrates on increasing revenue (throughput), providing capacity (operating expense) and improving cash flow (investment). Every management decision is made on basis of expected changes in throughput, operating and investment expense. Throughput Accounting assists managers to take a much more balanced approach on decision making, giving a precise picture of the decisions results. Throughput Accounting also displays ways to make more cost-effective marketing and decisions (Dyson 56). Throughput Accounting changes the emphasis on decision making from management of costs and budgets to maximization of throughput and profitability. It accentuates the improvement of cash flow through the organization, providing feedback on financial impact of the constriction. It drives management decisions for improvement of the constraint’s efficiency; making sure all organizations resources support the constriction, so that profit will be maximized, this tool will be particularly good on private hospitals aiming at making profits (Smith 336). Importantly, this approach differs significantly from Traditional Cost Accounting (TCA) because the organization is not focused on every employee and machine working at optimal competence. Instead, its foundation is that if an organization optimizes any non-constraint available, it will overload these constraints and generate excess inventory. Throughput Accounting offers a way to measure improvement efforts of productivity based on how they relate to cost and throughput. It may be applied to decisions which affect all aspects of organizations including product price, reward structures, investment justification, process improvement, transfer pricing, and organizational performance management. The results are thorough indulgent of how an organization is functioning entirely and the ability to examine the true impact of management accounting decisions before they are implemented (Dyson 419). Budgetary Control Budgetary control is management accounting’s one of best technique used to control, manage and plan finances in which every organizational departments budget is formed with estimated data. After that, managers compare this estimated data with the original data and repair the responsibility of employee when variance will not be favorable. With budgetary control, an organization can use forecasting techniques to plan the future. Three departments work for calculating best future estimation. Accounting department provides the old data (Kimmel, Weygandt and Kieso 44). Statistical department provides forecasting tools and techniques such as probability, time series other sampling systems. Management department uses the both department services in estimating the expenditures and organization revenue under the normal administrative conditions. Manager makes budget and display the target of the organization and employees are offered the powers to carry out these targets. After examination the variance in budget by budgetary control process, managers can fix each department responsibility and its employees on a particular cost center. Hospitals and university institution can only effectually use its resources, if the management is keen against misuse of fund. If budgetary control is employed in organization, at that moment, no action can be taken before budget making. Financial Statement Analysis Financial statements are normally the final output of organization’s accounting operations. These statements provide information relating to the retained earnings, expenses, assets, liabilities and revenues of the business. Hospitals and universities often focus to this information as the statements can give detailed information about the organizations’ operational performance. Managers in hospitals and universities should use specific analysis tools for closely reviewing their organization’s financial statements for running and decision-making purposes. A typical financial statement analysis tool involves financial ratios. The financial ratios take information from organizations’ financial statements and calculate the economic indicators for evaluation to another organization or the organization standard. Financial ratios include profitability, asset turnover, financial leverage and liquidity calculations. Liquidity ratios calculate organizations’ ability to meet the short-term financial requirements (Weygandt 34). Asset turnover ratios show how well the organization uses its assets to make profits. The financial leverage ratios calculate organizations’ long-term solvency. Profitability ratios help organizations determine how much income they are generating from their activities. This tool is good for both hospitals and universities. Some of the types of financial analysis include:- (i) Horizontal Analysis The horizontal financial statement analysis relates current financial statements with previous year(s) financial information. Organizations often conduct this kind of analysis by putting numerous years of financial statements by a side-by-side evaluation format. This helps organizations and managers to evaluate the same month over many years to determinate if expenses, revenues, assets or liabilities have decreased, increased or remained the same. Organizations can also use the horizontal analysis to compare cash amounts changes or a percentage change by comparing financial statements of previous year. (ii) Vertical Analysis Vertical financial statement analysis can be conducted using normal size financial statements. Common size financial statements show each item on financial statements in a percentage figure of every statement line item. Vertical analysis gives organizations a different option of reviewing financial information as managers may be more contented looking at the percentages rather than cash amounts. The percentage figure displays how specific line-item amounts relate to the aggregate financial statements total. For instance: managers may wish to recognize what percentage office supplies are out of the reported total expenses on organizations’ income statement. (iii) Trend Percentage Analysis Trend percentage analysis is a superior horizontal analysis tool. Trend percentage analyses assist companies identify consistent expenses or revenues from past accounting time. These trends can help organizations make business decisions concerning future operations. Universities and hospitals will use specific financial statement as the base year for relating all future financial statements. Variations for each future time are expressed inform of percentage when related to the base financial statement (Abdel-Kader 226). Organizations can conduct trend percentage analysis at several times of the year as well as using different financial statements as their base during this comparison procedure. Conclusion Hospitals and universities will gain control of their finances by using the above discussed set of tools. Management accounting tools can help these organizations to make wise decisions through the vigilant analysis of financial information that relates to current operations and projective business opportunities. Management accounting is the internal business function that is used to allocate organization goods or services costs. Mangers should use management accounting tools and techniques to ensure that they recover all production costs after selling goods or services within the economic marketplace. These tools and techniques may also be used to make cost-volume-profit reports, build break-even analyses or financial information to decide the minimum financial amount an organization must generate to recompense for variable and fixed expenses. Works Cited Abdel-Kader, Magdy. Review of Management Accounting Research. Washington: Palgrave Macmillan, 2011. Dyson, J. R. Accounting for Non-Accounting Students. New York: Financial Times Prentice Hall, 2004. Kimmel, Paul, Jerry Weygandt and Donald Kieso. Accounting: Tools for Business Decision Makers. New York: John Wiley & Sons, 2010. Smith, Paul. Management Accounting and Financial Management. London: FK Publications, 2012. Weygandt, Jerry. Managerial Accounting: Tools for Business Decision Making. New York: John Wiley & Sons, 2009. Read More