Flexible Budgeting
Quality Care is an urgent care facility organized as a free-standing business model separate from the regional hospital system. Their mission is to provide an affordable alternative to the emergency room for patients who have an illness that is not life-threatening or an injury that needs immediate medical attention. Quality Care is open 365 days a year to provide affordable health care with short wait times. Their facility is designed and staffed to provide care for a range of 7,500 to 8,800 patients per year without any significant change in fixed costs. Their flexible budget for the most recent fiscal year based on an expected volume of 8,000 patients is presented below.
| Revenue | $640,000 |
| less: | |
| Variable costs | $72,000 |
| Contribution margin | $568,000 |
| less: | |
| Fixed costs | $520,000 |
| Operating income without income taxes | $48,000 |
The actual patient volume for the year was 8,600 patients. Using a flexible budget, compute the amount of the “Operating income without income taxes” that Quality Care should have expected for the most recent fiscal year.
Quality Care is an urgent care facility dedicated to offering an affordable alternative to emergency room services for non-life-threatening illnesses and injuries. To effectively manage their finances, Quality Care employs a flexible budgeting approach. In this essay, we will explore how Quality Care can use flexible budgeting to assess its financial performance when the actual patient volume exceeds the initially expected volume.
Flexible budgeting is a dynamic financial planning tool that allows organizations to adjust their budgets in response to changing circumstances, such as variations in patient volume. It’s particularly useful for businesses like Quality Care, where patient counts can fluctuate.
Quality Care’s initial budget for the most recent fiscal year was based on an expected patient volume of 8,000. The budget components were as follows:
Revenue: $640,000
Variable Costs: $72,000
Contribution Margin: $568,000
Fixed Costs: $520,000
Operating Income without Income Taxes: $48,000
In reality, Quality Care saw 8,600 patients during the fiscal year, surpassing the initial estimate. To determine the expected operating income without income taxes based on this actual performance, we will use flexible budgeting principles.
To calculate the expected operating income without income taxes with the actual patient volume, we will adjust the variable costs and revenue according to the actual number of patients:
Variable Costs per Patient = Total Variable Costs / Expected Patient Volume Variable Costs per Patient = $72,000 / 8,000 = $9 per patient
Expected Variable Costs (with 8,600 patients) = Variable Costs per Patient × Actual Patient Volume Expected Variable Costs = $9 per patient × 8,600 patients = $77,400
Expected Revenue (with 8,600 patients) = Revenue at Budgeted Volume + (Variable Costs per Patient × Actual Patient Volume) Expected Revenue = $640,000 + ($9 per patient × 8,600 patients) = $718,400
Now, we can calculate the expected contribution margin and expected operating income without income taxes:
Expected Contribution Margin = Expected Revenue – Expected Variable Costs Expected Contribution Margin = $718,400 – $77,400 = $641,000
Expected Operating Income without Income Taxes = Expected Contribution Margin – Fixed Costs Expected Operating Income without Income Taxes = $641,000 – $520,000 = $121,000
Using flexible budgeting, Quality Care can expect an operating income without income taxes of $121,000 for the most recent fiscal year, given the actual patient volume of 8,600. This analysis demonstrates the importance of flexible budgeting in adapting to changing circumstances and making informed financial decisions to ensure the sustainability of the urgent care facility. It enables Quality Care to better assess its financial performance and make necessary adjustments to optimize its operations and profitability.
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