Healthcare in the UK and Zero-based versus Incremental Budgeting - Essay Example

?Task 711718 HSC Everton HSC Trust Manager Management Accountants Healthcare in the UK August 10, Report Healthcare in the UK is funded by UK taxpayers (Nuffield Trust 2011). It is undoubtedly the ‘world’s largest publicly funded health care system’ and is known as the National Health Service (NHS). It is completely funded by a central tax which is representative of a contribution of ?2,950 per annum for each citizen. Healthcare’s share of GDP in the UK is 9.4%. Most of the funds (82%) come from general taxation and the balance (18%) from private insurance and user fees (itup.org 2008). HM Collector of Taxes is the main collecting agency for the tax. The fees and private insurance are paid to the hospitals. The statistical data for the financing of health care in developed countries shows that expenditure on health as a percentage of GDP for the UK was 8.4%; U.S 16% and France 11% in 2009 (BBC 2009). The expenditure from the private sector for that same period was 12.9% for the UK, 52.8% for the U.S. and 20.8% for France (BBC 2009). The expenditure per capita on health in the United States dollars (US$) was $2,992 for the U.K; $7,290 for the US and $3,601 for France (BBC 2009). At the same time, the infant mortality per 1,000 live births in 2009 was 4.8 for the UK; 6.7 in the US and 3.8 in France (BBC 2009). NHS is negatively affected by increasing cost pressures despite the freeze on pay for people employed in the public sector (HJMA 2010). Although spending on healthcare is expected to increase each year, all the trusts operated by the NHS (inclusive of Everton HSC Trusts) will have to find ways of doing more with limited funds. The factors that may influence the availability of financial resources for trusts include: the contribution made to the fund by each citizen; the amount of taxes collected; and the use of the facilities supported by the trusts. The current contribution per person – The amount contributed per person is low in comparison to that of the United States and France. That amount can do so much and no more and while some of the trusts may end up with a surplus others end up with a deficit. Whether the trust has a surplus or a deficit is dependent on how patients view the services offered. Funding is based on the number of patients served. A decline in the demand for service at a particular health facility will result in a decline in the income earned by that facility and therefore the income of the fund will decline. The amount of tax collected – this will influence the amount available for health care in general. It will affect the health system and may result in a further increase in waiting times for some medical procedures. Use of facilities – If the facilities are not utilised they will not receive much from the fund as the amount dispersed is dependent on the number of patients that use the service. The current pressures in healthcare costs and spending has forced the NHS to looks for others means ensure the effective operations of healthcare system in the UK. The Trusts play a useful role but funding is inadequate. Most of the taxes that are collected by the government are direct taxes from the income of individuals and company tax. Indirect sources include value added tax (VAT), custom and excise duties, and air passenger taxes. Creative ways have to be found to increase government revenues. This is the only way in which the pressures on healthcare funding can be alleviated. Task 2 To: CEO Hampstead NHS Trust From: City Management Accountants Subject: Zero-based versus incremental budgeting Date: August 10, 2012 Report Introduction According to Noreen et al (2010), budgets are used for both planning and control. Planning entails setting goals and preparing budgets to guide the process. Control entails taking the necessary steps to ensure that the goals that have been set are achieved. The budgeting process for HSC entails setting targets in relation to both income and expenses. Benefits of Budgeting Noreen et al (2010) indicate that there are many benefits that can be derived from preparing budgets. The benefits that HSC would derive from budgeting include: Communicating management’s plans for the Trust. Forcing all managers of the respective health facilities to focus on the plan and the future so that they do not spend all their time on day-to-day matters. The process enables the allocation of resources to those areas in the organisation that needs it most and where they can be used to achieve the organisation’s goals. The process can also discover bottlenecks before they happen It facilitates the coordination of all activities in the organisation by combining the plans from various departments and ensures that everyone is working towards the ultimate goal. This involves monitoring and comparing what has been achieved each step of the way with the budgeted performance. In this regards, budgets are used to define goals and can be used as benchmarks against which actual performance can be evaluated. Zero-based budgeting versus Incremental budgeting Zero-based budgeting requires starting from scratch with no authorised funds to budget for expenses and income. Each activity has to be justified each time a budget is prepared. It does not rely on a historical base to determine what expenses and income will be but evaluates all items in order to determine whether they are still relevant. Amounts are only budgeted if the activity can be justified. This method is very time consuming as each expense or activity has to be justified. However, the advantage is that it allows managers to gain on understanding of how to prepare a budget from scratch. It is an excellent way to train managers who have never prepared a budget from scratch. It eliminates the need for management to decide how to reallocate budgeted amounts for expenses which are no longer relevant. Incremental budgeting on the other hand uses a historical base to determine the estimates for income and expenditure. One of the advantages of incremental budgeting is that adding increments to previously estimated amounts does not require a lot of time as managers simply increase expenses in the previous budget by a percentage. However, there are certain disadvantages that need to be noted. Expenses that are no longer relevant to the Trust may still be included. Increasing expenses may not be justified as some expenses are one off expenses. This leaves lower level managers with the task of deciding how to reallocate funds and therefore encourages waste. An additional disadvantage here is that the funds may not be reallocated efficiently. The use of activity based budgeting could be considered as an alternative since it links activities to costs and gives the managers of HSC a better understanding of the total cost of the services and how all the resources are allocated. After calculating the full cost of each activity, drivers are then used to map supporting activities to HSC’s main activities. The use of this budgeting method will facilitate control by managers at all levels through the process of: assignment of staff based on the demonstration of a need in a particular area of its operations; expansion or contraction of personnel in accordance with needs; facilitating the discovery of waste and hidden costs; making it easier to identify areas where expenses can be reduced; and allowing managers to argue budgeted amounts based on information. This indicates that there are several types of budgeting in use and emphasises that the one chosen has to be in keeping with the activities of the organisation. Task 3 To: The Managers of Bournemouth Old Peoples Home From: City Management Consultants Subject: Flexible Budgets Date: August 10, 2012 Report According to Noreen et al (2010), a flexible budget takes into account the fact that the budget can be adjusted to show what costs should have been for the level of activity that was actually achieved. The flexible budget for Bournemouth Old People’s Home Ltd is shown in Appendix 1. The column labelled Flexi-budget shows the figures representing the flexible budget while the column labelled revenue and spending variances shows the individual variances between the actual costs and the costs that should have been incurred based on the level of activity. If actual revenue is greater than that shown by the flexible budget then the variance is favourable as seen in Appendix 1. On the other hand, if actual revenue is less than the variance unfavourable. If actual expenses are higher than flexible budget expenses then the variance is unfavourable, otherwise the variance is favourable. Explanation of Variances The flexible budget in Appendix 1 indicates that revenue variance is favourable at ?2,000. The cause for the favourable variance in revenue is that the items produced were sold at a higher price than that budgeted. The increase in price may be attributed to increase in demand as a result of scarcity or as a result of increases in costs. An increase in any cost element would necessitate an increase in price if profit margins are to be maintained. Material cost shows an unfavourable variance of ?900. The variance may be attributed to the theft of material. The problem can be corrected through proper stewardship of goods in stores. Labour cost shows a favourable variance of ?500. This could indicate that employees are producing at a higher level of efficiency than anticipated. The variance in fixed overhead cost is unfavourable and suggests that there has been an unanticipated increase in fixed cost or that a particular cost such as rental was due for an increase but was not included when the budget was prepared. This could have been avoided if costs were justified as in zero-based budgeting. The fixed overhead costs would have been verified and agreed increases would have been taken into consideration when the budget was being prepared. Responsibility for variances The store keeper would be held responsible for the unfavourable materials variance as more materials were taken from stores than were used in production. The reason for this is that more materials were taken out of stores than normal. If the cause was as a result of spoilage, then the reworking would affect labour hours negatively. This was not the case and so it is fair to assume that some materials that were removed from stores were not used in production. In terms of the unfavourable variance in fixed overheads, the manager who prepared the budget would be held responsible since overheads are fixed and do not vary with production. The variance appears to be associated with rental. The onus is on the preparer to determine whether any changes are anticipated as it is always possible in the long-run. Agreements relating to rental of premises should have been examined to determine if any changes should have been anticipated. Benefits of using fixed rather than flexible budgets Flexible budgets make adjustment to revenues and expenses based on the level of output attained in the specific period. Fixed budgets are also described as static budget and makes use the output level planned at the start of the period (Horngren et al 2000). Flexible budgets enable managers to calculate more informative variances than static budgets. Management by exception Management by exception is the process of concentrating on areas that are not operating as per expectations (Horngren et al 2000). Variances provide the necessary information that direct managers’ attention to the areas which they should concentrate on. They act as a guide in helping managers to find explanations and informs the decision making process. Fraud prevention In order to prevent fraud, there has to be proper recording of receipt and issues from both raw materials and finished goods stores. The custody of the stores needs to rest with one individual – the storekeeper. The task of the storekeeper is to ensure that entry to stores is only allowed to personnel employed to work in the area. The storekeeper should supervise these workers to ensure that proper procedures are followed. Goods leaving should be properly documented and checks should be made to ensure that the information on documents is of the same description and quantity as those checked. The documents should be signed by all those who are involved in checking. All vehicles should be checked when entering and leaving the premises on which stores is located. Regular stock counts should be carried out to ensure that actual inventory agrees with perpetual inventory. Explanations should be sought for any variances. All payments should be properly recorded and purchases should be checked to ensure that all payments made for goods and services are for the organisation and that the relevant goods and services are received. Additionally, all purchases should be based on purchase orders that have been properly authorised. The receipt of goods should also be checked to purchase orders and invoices to ensure that they agree. These should be signed off as received and placed into stores by the storekeeper. References BBC News. (2009). Healthcare around the world. [Online] Available at http://news.bbc.co.uk/2/hi/health/8201711.stm [Accessed on 7th August 2012] Horngren, C.T., Foster, G. & Datar, S.M. (2000). Cost Accounting: A Managerial Emphasis. 10th ed. New Jersey: Prentice Hall. HFMA. (2010). Cost pressures keep rising as budget brings mixed news. [Online] Available at http://www.hfma.org.uk/news/healthcare-finance/news/newsitem.htm?newsarticleid=588 [Accessed 8th August 2012] Insure the Uninsured Projects. (2008). The United Kingdom: The Health Care System. [Online] Available at http://itup.org/Reports/Fresh%20Thinking/UK.pdf [Accessed 9th August 2012] Noreen, E.W., Brewer, P.C., & Garrison, R.H. (2010). Managerial Accounting for Managers. 2nd ed. McGraw-Hill/Irwin. Nuffield Trust. (2011). Funding and Performance of Healthcare Systems in the Four Countries of the UK. [Online] Available at http://www.nuffieldtrust.org.uk/sites/files/nuffield/publication/funding_and_performance_of_healthcare_systems_in_the_four_countries_summary.pdf [Accessed 8th August 2012] Appendix 1 Bournemouth Old People's Home Ltd   Flexible Budget and Variance Analysis for the Month of April     Budget A Actual B Flexi-budget C Revenue and Spending Variances Favourable (F) or Unfavourable (U)             Output 1,000 900 900                 Revenue 100,000 92,000 90,000 2,000 F             Materials 40,000 36,900 36,000 900 U             Labour cost 20,000 17,500 18,000 500 F Labour hours 2,500 2,150 2,250 100 U             Fixed overheads 20,000 20,700 20,000 700 U             Operating profit 20,000 16,900 16,000 900 F Read More