Possible Effects of Budget Preparation on the Behavior of Laundry Supervisor - Essay Example

?PARAPHRASING WORK: There is a close association of good budget preparation with the performance revaluation. Both are so closely linked that a faultin budget preparation would lead to inappropriate performance revaluation at all the times. The paper articulates the behavior of laundry supervisors when the variance between the actual results and budgeted results has not been taken into account. In other words, how did the behavior of laundry supervisors changed when they were not given the actual targets. The organization used in the paper i.e Rivington Hospital can use several methods to decide whether the variance was caused due to negligence of its own staff or whether the variance occurred because of the factors that were outside the loci of control of laundry managers. It will further demonstrate how flexible budgets can be used to revisit the budgeted targets after a change in uncontrollable exogenous factors that have a bearing on the performance of the company. The paper concluded by suggesting to the higher level management of the actions they can use to implement and prepare budgets that truly reflect the organizational performance. 1. Possible Effects of Budget Preparation on the Behavior of Laundry Supervisor: Budgets fall under the category of responsibility accounting. The reason they are given this name is because laundry supervisor can be given enough discretion to manage her own department and at the same time she will be questioned on any results that were below the budgeted performance. It helps the higher level management is focus on their core competencies and organizational planning, setting up strategic goals and looking after other more important aspects of the business by giving the duty of performing day to day budget of one department within the organization to its supervisor. This is a motivational thing for the department supervisor as well. She will try to beat her own budget and achieve better performance if the budget achievement is linked with performance rewards. The current budget preparation process has certain big flaws. First of all since people closer to the action were not consulted before making the budget, a lot of useful information would have been omitted from the budget preparation process. This is particularly bad as the supervisors might not be able to achieve their targets because the budget was not realistic and all blame will fall on the supervisors. Similarly, it will be impossible to link the laundry function of the organization with other functions. This will create negative synergy or less result from more effort. Certain functions of the laundry department and costs of laundry departments are linked with the results or decision taken by other departments. For example, it is the nursing department that decides on how frequently it will change the bedding of the patient. If they decide to change the bedding daily, whereas the budget was prepared keeping in mind that the bedding will be changed not before three days, then the costs of the laundry department will rise. If no alteration is made to the original or planned budget than laundry supervisors will not even try to achieve the budget and their negative feelings towards the organizations will be reflected and translated to the entire organization. This will result in the performance decrease in the entire organization. Any variation in the budget should be investigated only when it is material to investigate the scenario. For example, a lowly amount of $10, even if the change is more than 5% should not be undertaken because the entire investigation process would further waste the resources of greater than $10. Hence, lowly amounts are not worth investigation and only those amounts which are large enough to contribute to the organizational saving should be investigated. In other words variances should only be investigated if the cost of doing research is less than the benefits obtained from the investigation. The current process of budget preparation is that each department has to look after the costs of its own department. There is no complete view of the organization or there is no attempt to integrate one department as a part of one large setup and try to achieve the aims and objective of the entire organization as a whole using the synergy created by each department. Since each department is looking after itself, the aims and objectives of the department might be incomplete or will fall short of the aims and objectives of the entire organization as a whole. The organization will miss the bigger picture by focusing on each department separately. For example, laundry department might try to achieve its own objective by putting in less effort in cleaning the beddings. They may use less detergent and run smaller dry cleaning cycles. This may save the cost, but the overall organizational aim of providing excellent quality to patients would not be achieve. Hence, the overall targets will be achieved at the department level, but the overall targets of the organization will suffer by using this approach. The solution here could have been the flexed budget in order for the laundry supervisors to know the amount they can spend on each customer in their laundry process. 2. Investigations of Variances: Variances should only be investigated if it is material to investigate them. The cost of investigation should be lower than the amount of benefits or saving that the firm is going to achieve using the investigated result. The variance investigation results should increase the controllability of variance in the future or in future the variance can be avoided. The investigation personnel should be able to track down the trend of variances and should derive whether the variance was caused due to interdependence or due to the negligence of one department itself. The management of Rivington Hospital should use Rule-of-Thumb model, statistical significance model and control charts to investigate the variances. The rule of thumb model describes the acceptable limit of variances and only if variances cross certain limit, they are investigated. Statistical significance model is more complex than the rule of thumb model. Under this model historical data is used to calculate the level of significance, standard deviation and expected variance. Only if the variance falls under the critical region it is investigate otherwise it is ignored because it is considered immaterial to investigate variances that do not affect the organizational performance. A control chart method is similar to the rule of thumb model. It sets upper and lower control limits and only if the variances falls above the upper limit or below the lower limit it is investigated, otherwise it is ignore because such investigation would be useless and immaterial as benefits gained from the results would be less than the costs of finding the reasons behind the variance. 3. Performance Report: The new performance report is created using the core accounting concept of controllability. Management accounting puts great emphasis on the concept of controllability. It states that managers can be made responsible only for those items which they can control and they should and cannot be made responsible for exogenous factors or those factors which were outside their loci of control. It has been deduced that the laundry managers were not responsible for the variances and hence they are not responsible for budget breach. Instead a flexed budget should be prepared to match their actual performance with the revised performance targets considering the additional patients and additional thought kilograms of detergent used. The new budget targets should be revised by the management on the basis of additional washing detergent being used There is a hike in wages due to increased waiting period by the patients There is no change in other expenses Since more machinery is being used due to additional pressures and additional bedding being used, the maintenance budgets should also be increased, because increase in the use of machinery is going to increase the maintenance costs The optimum amount of weight should be 100,000 kilograms for 8000 patient days. This is because some patients might require different bedding services than ordinary patients. As a result there would be change in other associated expenses in the overall budget aswell. Calculations: Flexed Actual Variation F/A Laundry per patient day (Kg) 81250/6500 = 12.5 12.5*8000= 100000 101170 -1170 A Wages per patient day 3450/6500 = 0.54 0.54 * 8000 = 4320 4125 195 F Washing Materials per thousand kg of Laundry (770/81250)*101170= 9.4769 ? 0.009476*101170= 959 920 39 F Heating and Power per thousand kg of laundry (510/81250)*101170= 6.2769 ? 0.0062769*101170= 635 560 75 F Equipment Maintenance Costs per thousand kg of laundry (45/81250)*101170= 5.5385 ? 0.00055385*101170= 55 10 45 F Memo: To: Rivington Hospital From: Management Accountant Please refer to the attached report. I am pleased to inform you that we have adopted the new system. You will get a new report each quarter now. The principle we are following from now on is responsibility account and our emphasis would be on controllability. Under the new way of doing things you will be responsible for the budget of your department only and factors such as volume of patients which is out of your control will be taken into account before the performance revaluation of your department. My team will judge you on the basis of flexed budget which will adjust the budget on the basis of volume of patients that we have each quarter. We have also decide that any variance crossing the limit of 5% will be investigated. However this condition does not apply to any variance under $50. We will ignore any variance under $50. Please refer to your performance report. Laundry Performance Report: Budgeted number of patient days 6500 Actual number of patient days 8000 Budgeted weight of laundry processed (kgs) 81250 Actual weight of laundry processed (kgs) 101170 Initial Budget Flexed Budget Actual Variation F/A Variation% Departmental Expenses   Fixed (?) Variable (?) Total (?) Wages 3450   4246 4246 4125 121 F 2.8 % Supervisor Salary 1495 1495   1495 1490 5 F 0 % Washing Materials 770   959 959 920 39 F 4 % Heating and Power 510   635 635 560 75 F 11.8 % Equipment depreciation 250 250   250 250 0 0 % Allocated Administration Costs 2000 2000   2000 2460 (460) A -23 % Equipment Maintenance 45 55 55 10 46 F 78 % Total   9640 9815 (175) A -1.8% We are delighted with your performance, however my team member would like to know about your reluctance to use maintenance budget. Please give us a buzz as soon as possible. We would love to hear from you. Regards, References Dyson, J. R. (2010) Accounting for non-accounting students: 8th edition. Financial Times / Prentice Hall. Seal, W., Garrison, R., & Noreen, E. (2009). Management accounting. Berkshire: McGraw-Hill Education. Read More