Finance 6/ Budgeting

Pricing of clinical services

1. 3 key issues relating to pricing of clinical services a. Unit of payment b. HCO mission c. HCO market strength

Equity & Nonprofits-5 key facts

1. Equity for nonprofits can increase only from donations and retained earnings. 2. Equity is useful in joint ventures, allowed partners to be rewarded for risk taking. 3.. Non-profits can retain tax exemption for their share of earnings if they hold certain levels of control. 4 Bulk of non-profit HCO's investments should be in low-risk debt securities. 5 High risk investments limited to amounts that HCO could lose without impairing the mission.

3 assumptions of breakeven analysis:

3 assumptions of breakeven analysis: a. Volume increases are not attained by lowering prices, and price increases are not met by volume declines. b. Cost can be reasonably subdivided into fixed and variable components c. Both fixed costs and variable cost rate are independent of volume over the relevant range, so both the total cost and total revenues are linear

4 Forecasting Techniques

4 Forecasting Techniques: 1. Use of Experts 2. Probability statistics (PERT) 3. Causal Models 4. Time-series Method

Bottom line verse the cash line

4. Unlike the bottom-line of the income statement, the change in cash line has limited value in assessing an organization's financial condition because it can be manipulated by financing activities. Net cash from operations is more important indicator of the financial well-being than the net increase (decrease) in cash line. 5. Net increase (decrease) in the cash line is used to verify the correctness of entries of the statement of cash flow.

5 Components of the Operating budget:

5 Components of the Operating budget: i. Accountability Centers ii. Aggregate iii. Capital budget iv. Financial Budgets v. Cash budget

5 Functions of Financial management:

5 Functions of Financial management: a. Financial planning b. Pricing c. Management of long-term capital d. Management of short-term assets & liabilities e. Multi-corporate accounting

5 factors affecting bond rating and rating agency reviews:

5 factors affecting bond rating and rating agency reviews: a. Legal provisions (by-laws, corporate provisions) b. Market position and institutional characteristics (eg. Ability to adapt to market changes) c. Medical staff traits (number and age) d. Financial indicators (forecasts for debt payment) e. Management capacity: i. Education/ experience ii. Budget management iii. Mission & vision (how well goals reached) iv. Financial & human resources manangement

6 Common Uses of Managerial Accounting Analysis:

6 Common Uses of Managerial Accounting Analysis: i. Preparing forecasts for expanding/closing units ii. Comparing alternative protocols or work processes, esp if substituting capital for labor. iii. To forecast trends in demand, cost, output, and efficiency iv. Prepare new budget expectations. v. Make-or-buy decision (local production vs. outside purchase) vi. Rank cost-saving opportunities.

6 Prerequisites for Budgeting

6 Prerequisites for effective budgeting: 1. Sound organizational structure for management accountability. 2. Well-defined account chart that corresponds with organization structure. 3. Accurate accounting to ensure financial responsibility for budgeting. 4. Comprehensive management information system that captures nonfinancial information of each department. 5. Responsible budget director who serves at budget committee chair 6. Budget committee (senior managers) that establishes calendar & manual for developing the budget

Accounting Identity:

Accounting Identity: 1. Definition: a. Total assets must equal liabilities plus equity (total asses must equal total claims. b. Reminds us that equity is really a residual amount that represents the difference between assets & liabilities.

Budget Process Step: Adjust revenues and expenses necessary:---Roles of Budget committee and executives in this step?

Adjust revenues and expenses necessary: a. Budget committee may recommend to executive management ways to generate additional revenues or ways to reduce expenses if expenses exceed revenues. b. To cover shortfall, executive management consider the effect of quality of care due to expense reduction, whether to release funds from unrestricted net asset accounts to cover the loss, and the possibliy of generating additional revenues.

Freedom of Information Act

After the audited income statement is filed, it is available to the public under the Freedom of Information Act. i. Well managed HCO deliberately publish their financial reports as part of their program of community relations ii. Subsidiaries of integrated systems, both for profit and nonprofit, are not automatically required to disclose financial information

External Auditor

Auditors: a. Keep deliberate distance from internal employees being audited b. Uses objective methods to verify accuracy of reported values on balance sheet c. Review accounting processes and suggest changes. d. Auditor is accountable to the finance committee e. Can't use a auditing firm that is represented on the board f. Can't hire consultants from firm that is doing audit. 5. Governing board selects the outside auditors, receives the report and reviews it carefully. Board must approve both financial reports and the management letter. 6. Auditors report goes to auditing committee so auditors are free to comment on levels of management

3 Uses of Budgeting

BUDGETING: 1. Converts operational plan into monetary plans for planning purposes 2. Used as control standard to measure the performance of subordinates 3. Used to educate nonfinancial staff on the financial well-being of the organization.

Pro forma & Break even analysis

Both the Pro forma P&L statement and breakeven analysis are used to estimate relationships between cost, volume, price, & profit: a. When the focus is breakeven volume, the same 4 variables (cost, volume, & price) used while the profit is assumed to be known while volume is unknown. b. When the focus is profit (P&L statement), three assumed variables are cost, volume, & price, while the profit is calculated.

Bottom-line of the Statement of Cash Flow:

Bottom-line of the Statement of Cash Flow: a. Represents the net increase or net decrease in cash. b. Useful in verifying the accuracy of the cash flow statement

Business Transactions affect on its balance sheet & income statement:

Business Transactions affect on its balance sheet & income statement: a. Investment by owners results in equal increase in both assets and equity b. Purchase of equipment with cash→ equal increase and decrease in total assets c. Purchase of supplies with Credit→ Liabilities are increased by the amount owned to the supplier d. Services are provided by credit or by sending a collection bills-→ increase in assets (accounts receivables) and increase in retrained earning (equity) when revenues earned, even though no cash generated. When accounts receivables are collected at later date, cash will be increased and recievables will be decreased. e. Purchase of advertising on credit card-→ increase in liabilities and decrease in equity; accounts payable is increased and retained earnings (equity) decreased. When payment to creditor is made at later date, both payables and cash decrease. Equity is reduced when expenses are incurred. f. Payment of expenses-→ equal decrease in cash & equity. Decrease in equity will be matched by a reduction in net income on income statement. g. Cost of supplies to provide a services-→ decrease in net income (production cost); decreases bot assets and equity. h. Payment of accounts payable (either for cost of supplies or for advertising)-→ Payment of liability related to an expense previously booked does not affect equity. Equity is not affected until the asset has been consumed. i. Reciept of cash from third-party payer-→ Total assets are not changed but does increase cash and reduce recievables. a. Investment by owners results in equal increase in both assets and equity b. Purchase of equipment with cash→ equal increase and decrease in total assets c. Purchase of supplies with Credit→ Liabilities are increased by the amount owned to the supplier d. Services are provided by credit or by sending a collection bills-→ increase in assets (accounts receivables) and increase in retrained earning (equity) when revenues earned, even though no cash generated. When accounts receivables are collected at later date, cash will be increased and recievables will be decreased. e. Purchase of advertising on credit card-→ increase in liabilities and decrease in equity; accounts payable is increased and retained earnings (equity) decreased. When payment to creditor is made at later date, both payables and cash decrease. Equity is reduced when expenses are incurred. f. Payment of expenses-→ equal decrease in cash & equity. Decrease in equity will be matched by a reduction in net income on income statement. g. Cost of supplies to provide a services-→ decrease in net income (production cost); decreases bot assets and equity. h. Payment of accounts payable (either for cost of supplies or for advertising)-→ Payment of liability related to an expense previously booked does not affect equity. Equity is not affected until the asset has been consumed. i. Reciept of cash from third-party payer-→ Total assets are not changed but does increase cash and reduce recievables.

CVP Analysis in Capitated Environment:

CVP Analysis in Capitated Environment: 1. A Capitated environment changes the situation for providers with vis-avis a fee-for -service environment, Capitated provides takes on the insurance function. 2. Under capitation, the revenue per unit of volume, when measured, is zero. Thus, provider risk is minimized with high DOL (high fixed costs), which results in a low variable cost rate and a small, but negative, contribution margin. 3. To do CVP analysis in capitated environment, need cost information and utilization information (actuarial) 4. Key feature of capitation is the reversal of profit and loss portions of graph--→ Profits occur at lower volumes under capitation is contrary to fee-for-service environment. 5. Contribution margin in capitated environment: a. Contribution margin is negative in capitated environment b. Fee-for Service= higher portion of fixed costs drives Positive contribution margin even higher c. Capitated reimbursement= high portion of fixed cost drives the negative contribution margin toward zero 6. Higher fixed cost structure leads to lower risk in capitated environment, while a higher variable cost (lower fixed cost) structure leads to lower risk in a fee-for-service environment. Reduction in risk lowers the rewards attained from utilization management

Why is Capitation risky?

Capitation: a. HCO gets a fixed amount per person as compensation for care b. Most financial risk because the fixed amount is based on the cost of care projected to be used by the covered population, rather than cost of care. c. Financial incentives for the HCO to contain cost before patient seeks care via premiums (payments negotiated before patients seeks care)

Cash Budget

Cash budget i. Projection of monthly cash flow ii. Used to manage working capital

Forecasting Techniques: Causal Models

Causal Models: 1. Forecast variable is dependent on causal, independent, variable. 2. Regression Analysis: a. Most common statistical method used in causal model b. Best used for long-term forecasts c. Describes the response to forecast variable to changes in one or more causal variales d. R^2 = coefficient of determination= proportion of variance in the forecast e. Beta coefficient= measure of statistical contribution of causal variable to regressions' causal power; indicates the relative importance of each of the causal variables in explaining or predicting changes in forecast variable.

Common managerial accounting analyses include:

Common managerial accounting analyses include: a. Analyzing and forecasting interaction of demand, cost, output, and efficiency. b. Comparing local production with outside purchase called "make-or-buy" decision

Financial Budget Components

Components of the Financial budget: 1. Income & Expense budget (expected net income and expenses incurred by the organization as whole) 2. Funds flow budget (estimate of cash income and outgo by period, used by finance in cash and debt management) 3. Capital and new programs budget (capital and new programs accepted by the governing board, with their implications for the operating and cash budgets by period and accountability center)

4 Controllerships Functions:

Controllerships Functions: 1. Transaction Accounting 2. Managerial Accounting 3. Financial Accounting 4. Goal Setting and budgeting

Budget Process Step: Convert Volumes to Expense Requirements---Discuss labor and non-labor expenses

Convert Volumes into Expense Requirements a. Calculation of labor expense with benefits, nonlabor benefits, and overhead expenses. b. Budget histories indicate labor expense with benefits per production unit. c. Budget history for nonlabor expense include supplies, travel, and repairs. d. Senior management determines the benefits packages e. Department managers can reduce benefits expenses for part-time or contract workers (less expensive sources of labor) f. Department mangers should reduce non-labor expenses per production unit. g. Budget committee provides department managers with information regarding cost-of-living raises, merit raises & bonus i. Cost of living raises= protects employees during inflation and raise is administered to all employees at the same time ii. Merit raises= expensive for the organization because the raise amount is built into the employee's base pay for future years.; Usually given during performance appraisals. iii. Bonus= given at end of year and easy for organization

Budgeting Process: Convert Volumes to Revenues----2 methods of pricing?

Convert Volumes into Revenue: 1. Managers must consider whether the organization should budget revenues before or after the expense budget is completed 2. Cost-led pricing: a. Set rates in the revenue are determined after the expense budget is determined.; historically used by HCO in past. 3. Price-let costing a. Expenses are adjusted to match the projected patient revenues b. More common method now due to current trends of fixed payment arrangements (prospective payments & premium payments) 4. Gross patient revenues= (projected production untis) X (Projected charge) 5. Total patient revenues from operations= (net patient revenues) + (premium revenues) + (net assets used in operations)

What are Current Assets?

Current Assets Definition=cash and other assets that are expected to be converted into cash within one accounting period

DRG & RVU

DRG (diagnosis related group)= index of severity of illness (type of production unit) Relative value unit= relative complexity and related resource consumption.

Decision Matrix Used in Capital Budgeting

Decision Matrix Used in Capital Budgeting A table that allows a team to systematically identify, analyze, and rate the strength of relationships between sets of project information. It's especially useful for assessing each factor's relative importance . When to use it: A decision matrix is frequently used during planning activities to select the project priorities, goals, and weigh alternatives. The end result is a prioritized list of projects with discrete scores.

Decision Matrix & Capital Budgeting

Decision Matrix: The final step in the capital budgeting process is for the budget committee to evaluate the financial and non-financial benefits of each request and make decision. Budget committee can use decision matrix with weighted criteria to evaluate the decision.

How are objectives in the operating plan prioritized?

Department managers should prioritize the objectives of the operational plan based on community need, not on organizational profitability. To prevent bias in the operating plan, the budgeting process occurs after the operational plan has been completed, especially important for non-profits.

What are the 3 types of Financial Analysis used in Capital expenditure budgets? What is the difference between the three?

Discounted payback period analysis gives manager answer in years. NPV gives answer in dollars and IRR gives answer in percentages.

Evaluation of Capital Expense decisions

Evaluate Benefits & Make Decision: a. Budget committee evaluates both non-financial & financial benefits to make a decision using the decision matrix b. Internal audit departments review capital expenditures decisions and justifications of department managers to determine accuracy.

Evaluating Budget Performance: Variance Analysis

Evaluating Budget Performance: a. Variance= (actual)-(budgeted) i. Variance analysis ensures accountability by requiring managers responsible for variance to explain why variances occurred and what actions are taken to ensure favorable variances occur. b. Variance Analysis= most common method of evaluating budget performance. c. Expense variance= (actual expense)- (budgeted expense); Negative variances for expense are favorable and positive are unfavorable d. Revenue variance= (actual revenue)- (budged revenue); Postive revenue for expense is favorable and positive are favorable.

General Ledger

Expense transactions create general ledger (record of all the firm's transactions) v. General ledger: 1. Assigns capital costs through depreciation of long-term assets 2. Adjust inventory values 3. Allocate expenses of central services.

Feldstein's moral hazard

Feldstein's moral hazard (1981: goal of cost sharing is to inhibit the worried well, but not the truly sick from seeking care.

Financial Accounting

Financial Accounting a. Captures nonoperational transactions to establish value of the organization. i. Non-operating revenues= income generated from non-patient care activities, including investments in securities and gifts which are included in the income statement ii. Funds flow statement and balance sheet have nonoperational transactions. iii. Sale of assets & incurrence of debts-→ generate cash iv. Purchase of capital goods, charges for restructuring, retirement of deb-→ consume cash. b. Creates financial reports for owners and external stake holders

How is financial performance benchmarked?

Financial ratios provide the way to benchmark financial performance. a. Bond-rating agencies use the ratios and other financial statement data to issue public ratings of the risk associated with long-term debt. b. Lower ratings (higher risk) bring higher interest costs on debt. c. Institutions' ability to acquire capital is directly dependent on its ability to construct a competitive LFRP.

Fixed Assets (

Fixed Assets (property & equipment): i. Difference between long-term investments & fixed assets: 1. Fixed assets (property / equipment) not liquid and are used over long periods of time. They are fixed and maintained at a level to handle peak patient demand.

What is the forecast content in relation to budgeting? What is Forecast Rationale?

Forecast Content= A description of the specific situation in question. Forecast content must be prepared before manager can forecast the future volumes or production units for the upcoming budget year. Forecast Rationale= An explanation on how the situation will evolve from its current state to its forecasted state. It clarifies the results of the forecasting process, provides a basis for evaluating the forecasting process, and provides a basis from which future forecasts can be made.

Forecasting Method---Two Step process

Forecasting Method: ---Two step process: i. Prepare forecast content (description of specific situation in question; examples admissions, patient days, outpatient visits) ii. Prepare forecast rationale (explanation of how the situation will evolve from its current state to its forecasted state) 1. Clarifies the result of the forecasting process 2. Basis for evaluating forecasting process 3. Basis from which future forecasts can be made.

Forecasting Techniques: Use of Experts

Forecasting Techniques: Use of Experts 1. Delphi technique= information gathered from group of dispersed experts with limited interaction and anonymity of expert opinions; techinique for determining which expert is correct. 2. Delbecq technique (nominal group process)= group of experts meet face-to-face for discussion of forecasts.

Form 990

Form 990 i. Nonprofits HCO are obligated to report financial activities to IRS via this form which becomes public ii. Monitors the public's return for the privilege of tax exemption iii. Net revenue establishes charity care and bad debts under from 990

Four reasons that Financial Accounting statements evolved historically:

Four reasons that Financial Accounting statements evolved historically: a. Lenders could no longer inspect the assets that back their loans b. Loans made on the basis of a share of the business profits created a need for a widely accepted method of expressing income c. Owners required reports to see how effectively their own enterprises were being operated d. Government needed information for tax assessments

Four reports summarize the financial activities and situation of the organization:

Four reports summarize the financial activities and situation of the organization: i. Balance sheet ii. Income or the Profit & Loss Statement iii. Statement of sources and uses of funds iv. Statement of changes in fund balances

HCO may respond to the above future uncertainties

HCO may respond to the above future uncertainties by: i. Changing profit margin goals ii. Revising debt structure iii. Acquiring new equity investors iv. Revising expansion strategies v. Acquiring or divesting units vi. Merging or closing

HCO with community health mission

HCO with community health mission a. Mission calls for maximizing health, reducing unnecessary use of services, and maintaining high efficiency for all services b. Strategic performance measure address community health needs and needs of patients & associates. c. Community health mission minimizes community healthcare costs per capita by aligning the HCO mission with that of the insurance and insurance buyers. d. Accepts all levels of pricing with preference for higher levels

HCO with excellence-in-care mission

HCO with excellence-in-care mission a. Buyer-seller relationship is adversarial and depends on market power b. Extent to which seller can set the sales prices measures the monopoly-pricing power c. Management of charges is of concern to board and society. d. Major buyers (Medicare, Medicaid, and commercial insurers) balance the market power. e. Medicare prices are set annually in a national political process. i. Medicare Payment Advisory Commission (MedPAC) conducts research and holds hearings to develop market price ii. Medicaid payments established by states and are less than Medicare

Implication of Accounting Identity on Balance Sheet:

Implication of Accounting Identity on Balance Sheet: a. If a healthcare organization is liquidated and the creditor claims are paid before the equity claims, then liabilities are shown before equity on the balance sheet. b. If the business writes decreases in the value of its assets, its liabilities are unaffected because these amounts are still owned to creditors. c. If a total assets value drops below the liabilities, the total equity reported on the balance sheet is negative amount.

Importance of utilization management in a capitated environment:

Importance of utilization management in a capitated environment: a. With lower utilization, total variable costs are reduced and profit increases. b. Ability of provider to control utilization is the primary key to profitability in capitated environment. c. Less utilization means lower total costs, and lower total costs mean greater profit. d. Utilization changes affect variable cost rate & breakeven point. A. If utilization increases in number of visits, the variable cost increases. Higher variable cost rate increases total variable cost for any number of members, which pushes the breakeven point above the reference range.

Internal rate of return

Internal Rate of Return i. Superior to using NPV ii. Definition= discount rate of capital expendiures where discounted cash flows equal the expenditures's original investment or the discount rate where NPV is zero. iii. Gives the manager an answer in percent

Legislation Effects on Capital Growth

Legislation Effects on Capital Growth: a. Certificate of need (CON) legislation passed by federal government did little to slow capital growth. b. Capital costs were reimbursed based on cost so capital growth unaffected by Medicare prospective payments set by the Social Security Amendment Act. c. Omnibus Budget Reconciliation Act (OBRA) moved capital costs to prospective payments over 10 year implementation plan i. Medicare stopped reimbursing for capital costs due to OBRA--→ HCO , as a results, had to compete for limited capital funds ii. HCO no longer had cost-based reimbursements to use as collateral with lending companies. d. Tax Reform Act of 1886= lower the tax deduction for charitable gifts and increased the cost of acquiring capital via tax-exempt bond markets i. Limitation on individual tax deductions caused a decline in philantrophic donation given to hospitals. e. Tax Reform Act & OBRA slowed capital growth.

Long-term investments:

Long-term investments: i. Reported on the balance sheet at fair market value, rather than initial cost 1. Changes in market values result in gains or losses that must be reported on income statement 2. Income earned by long-term investments and marketable securities must be reported on income statement.

Management letter

Management letter is a document that contains the auditor's comments on account problems and weaknesses of the asset-protection policy; accompanies the financial reports.

Managerial Accounting

Managerial Accounting a. Definition-→process of restructuring transaction data to support monitoring, planning, setting expectations, and improving performance of accountability centers

What is Forecasting in relation to budgeting?

Managers rely on forecasting to project future volumes under conditions of uncertainty. Forecasting is the process of determining which alternative scenarios are likely to occur in the future, given what managers know about the past & present.

Marginal Analysis

Marginal Analysis: 1. Focus is on incremental (marginal) profitability associated with decreasing or increasing volume. 2. Marginal cost= cost associated with each visit and is variable cost rate

Marketable Securities:

Marketable Securities: 1. Short-term investments in liquid, low-risk securities such as bank savings account, money market mutual funds, U.S. treasury bills, or prime commercial check accounts 2. Marketable securities are preferred to cash holdings because they pay low interest, any return is better than none. a. Current assets (zero-return assets) should be converted into marketable securities (some return assets) quickly b. Providers who work with capitation have liquidity advantage (smaller accounts recievables & larger cash and marketable securities) over fee-for-service revenue providers 3. Marketable securities are built up by HCO to meet non-operating expenses (tax payments, legal judgements, or property/equipment investments) 4. Affected by changing interest rates, have maturities less than one year, and are listed at current market values on financial statement. v. Other Assets:

Net Present Value

Net Present Value i. Definition= ii. NPV equal to zero means the capital expenditure is generating discounted cash flows iii. Positive NPV= expenditure is generating discounted cash in excess of the amount needed to repay the original investment iv. Negative NPV= discounted cash insuffient to repay original investment. v. Difficult to determine the discount rate

Objective of the LFRP

Objective of the LFRP is to: a. Identify the optimum operating condition consistent with the mission b. To evaluate the condition in terms of its acceptability. i. Unacceptable LFRP can force reevaluation of the strategic position including the institution's existenc

Operating Budget: Accountability center:

Operating Budget: Accountability center: i. Used for one or two -year plan of accountability center goals ii. Content include Accountability-center-level expectations for demand, costs, human resources, productivity, quality, and customer satisfaction

7 Operational Measures of finance & Accounting

Operational Measures of finance & Accounting : 1. Current assets & Liability 2. Demand 3. Cost 4. Associate Satisfaction 5. Financial & Managerial Reports (audit reports) 6. Consult services (service delays, forecasts, corrections) 7. Long-term assets & Liability (endowments, age of plant, debt service cost)

Patient ledger

Patient ledger is account of the charges rendered to individual patient iv. When organized by individual patient, revenue transactions create a patient ledger.

Pay back period analysis

Payback Period Analysis i. Definition= number of years needed for cash flows to recover or repay original investments; easy to use and does not account for the effects of time & money: ii. Drawback is that it does not account for time & money iii. Discounting= used to compare capital expenditures that will generate future money (FV= future value) iv. Discounted payback period is similar to payback period except that discounted payback period gives the number of years it takes to cover the cost of the project by adding positive discounted cash flow coming from the profits of the project. Payback period only measure how long it take for the initial cash outflow to be paid back, ignoring the time value of money.

Primary purpose of current assets

Primary purpose of current assets is to support operations and provide liquidity. i. Business keep only enough current assets to support operations and maintain liquidity because of the low/zero return earned on current assets.

Forecasting Techniques: Probability Statistics

Probability Statistics 1. Unlike the Critical Pathway Model (Deterministic =Time estimates that are fairly certain.), PERT is Probabilistic (Estimates of times that allow for variation.) 2. The PERT modeling technique forecasts the time for each activity duration in the project, and hence is an example of a stochastic model (means showing random variation) . PERT also breaks down the tasks into detailed activities.Then, a Gantt chart will be prepared illustrating the interdependencies among the activities. Gantt Chart is used to schedule and monitor project activities., lists project activities, estimates of activity time length, and sequence of activities 2. PERT (program evaluation and review technique)= estimates optimistic time (shortest time), pessimistic (longest time), and (ML) most likely future scenarios.(most likely time). Three estimates are weighted to calculate an expected value in the formula below: a. (O= P +4ML)/6

Proforma

Proforma= forecast of financial statements, establishing the future financial position of the HCO for a given set of operating conditions and decisions

How is cash flow projected for non-revenue generating equipment?

Project Cash Flows: a. For equipment that does not generate revenue, department managers must project cash flow by using salary savings or utility savings.

Benchmarking quality of accounting and finance services

Quality of accounting and finance services is benchmarked and benchmarks are derived from financial ratios. i. Financial ratio= relative measure constructed from financial reports. ii. Number of posting and accounts maintained is a productivity indicator.

Define Regression Analysis, Coefficient of Determination, & Beta Coefficient.

Regression Analysis: 1. Managers use causal models when the forecast variable is dependent on a causal, or independent variable. The most common statistical method used in causal models is Regression Analysis 2. Regression Analysis mathematically describes the average relationship between a forecast variable and the changes in one or more causal variables. Coefficient of determination indicates the portion of variance of the forecast variable that is explained by the regression analysis. Always select the regression statistic that maximizes the Coefficient of determination. 3. Beta Coefficient measures the statistical contribution of the causal variable to the regression's causal power. It indicates the relative importance of each of the causal variable in explaining or predicting changes in the forecast variable

Relationship exists between depreciation expense on the income statement and the accumulated depreciation on balance sheet.

Relationship exists between depreciation expense on the income statement and the accumulated depreciation on balance sheet. 1. Fixed costs are listed at their purchase price (aka historical cost) minus the accumulated depreciation on balance sheet. 2. Amounts of depreciation expense reported each year on the income statement are accumulated over time to create accumulated depreciation amount on balance sheet.

Revenue Accounting

Revenue Accounting i. Gross Revenues--→Individual charges are associated with each transaction to calculate gross revenue (no longer meaningful measure) ii. Net Revenue-→ income actually received; equal to gross revenue minus adjustments for bad debts, charity, and discounts to third parties. iii. Patient ledger data can be used for case based payment schemes to identify catastrophically expensive cases (outliners) that qualify for additional special payment.

SWOT analysis

SWOT analysis is used for internal analysis----identifies weakness and strengths of the organization. It helps to identify opportunities for additional market penetration with existing or new programs and threats from competition.

Semi-fixed Costs

Semi-Fixed Costs 1. Definition= Costs that are constant within a defined level of activity but can increase or decrease when activity reaches the upper or lower levels. Costs that are fixed within ranges that are less than the relevant range. 2. Addition of the semi-fixed cost cause the cost behavior graph (Plot of semi-fixed cost verses volume) to look like step function -→ aka "step-function costs" 3. Inclusion of semi-fixed cost prevents average fixed cost and average cost per unit from continuously declining throughout the relevant range. 4. At volumes above the relevant range, the addition of a semi-fixed cost will cause a jump in total fixed costs (consisting of fixed and semi-fixed), average fixed cost, total costs, and average cost per test. Once this jump (or step) occurs, average fixed cost and average cost per unit again begin to decrease as volume increases. 5. Semi-fixed costs add complexity to profit analysis without adding much insight.

What is Statistical Budget?

Statistical budget is the process of projecting volumes or production units for a given budget year. Typically, budget Committee gives their projections of the organization's production units to department managers in the budget manual. Department managers will use these organization's projection units to calculate the department projection units for each department.

5 Steps in Budgeting Process:

Steps in Budgeting Process: A, Statistical Budget (aka. Project Volumes B. Convert Volumes to Revenue C. Convert Volumes to Expense Requirements D. Adjust revenues and expenses E. Evaluate budget Performance

Steps in Capital Budgeting Process:

Steps in Capital Budgeting Process: 1. Identify & Prioritize requests 2. Project Cash Flows 3. Financial Analysis

Three main objectives of Activity based costing

Three main objectives of ABC: i. Show of resource elements of cost so that the producing unit or performance improvement team can compare to benchmark and evaluate changes in activity ii. Provide a transfer price for internal transactions. The transfer prices can be compared to prices offered by external vendors. It encourages the using unit to identify and control consumption iii. Encourage the producing unit to think of the purchasing units as customers whose needs must be met

Forecasting Techniques: Time Series Method

Time-Series Method. 1. Past behavior of variable is available to predict the future behavior of the variable. 2. Fails to account for causal relationship 3. Identifies historic pattern that may repeat in future 4. Best to be used for forecasts less than one year

Transactions support three different analysis:

Transactions support three different analysis: i. Financial accounting ii. Performance reporting iii. Managerial accounting.

Two parts of Stockholder's Equity section of Balance sheet (For Profits)

Two parts of Stockholder's Equity section of Balance sheet (For Profits) a. Contribution Capital i. Sum of the common stock and capital in excess of par accounts; dollars of capital contributed directly, or paid out-of-pocket, by stockholders of corporations or by proprietors or partners of unincorporated business. b. Retained Earnings: i. Definition= accumulation of earning over time that are reinvested in business. ii. Represent a claim against assets, and they are not available to buy equipment, pay dividends, or any other purpose

Define Variance Analysis

Variance Analysis is a method for evaluating budget performance. It compares the budget production units, revenues, and expenses to the actual production units, revenues, and expenses on a monthly basis. For production units and revenues, positive variance analysis favorable. For expenses, negative VA favorable. It ensures accountability by having managers explain why variances occurred.

What is the difference between discounted payback period, IRR, and NPV?

a. Key Difference= Discounted payback period gives manager answer in years, NPV gives answer in dollars, & IRR gives answer in percent.

Earmaking Capital

d. Investment funds can be earmarked for strategic purposes, such development of new markets, replacement of facilities, or technology strategies (IT systems) i. Earmarking establishes multiyear level for category as whole and forces evaluation of proposal within the category, rather than between categories.

Protection against inurement

d. To protect against inurement, develop policies that reduce financial conflict of interest i. Every board member and officer must file annual disclosure statement that identifies all their financial interests and conflicting commitments, including membership on voluntary board. ii. Members are expected to divorce themselves from any specific decision or action that involves their interests or conflicting affiliations