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Chapter 11: Responsibility Budgeting

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This document discusses decentralization in healthcare organizations and responsibility centers. It defines decentralization and identifies major types of responsibility centers including service centers, cost centers, profit centers, and investment centers. The document also covers calculating revenue and expense variances for budgets, and examining responsibility, authority, and accountability. Financial measures beyond variances and compensation systems are also summarized.

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Responsibility Budgeting Chapter 11
Learning Objectives • Defining decentralization and its advantages and disadvantages • Identify the major types of responsibility centers in health care organizations • Explain the relationships of responsibility, authority and accountability • Compute volume and rate variances for revenue • Compute volume and cost variances for expenses
Decentralization • Degree of dispersion of responsibility within an organization • Advantages-More efficient use of time, more relevant info, higher quality decisions, greater speed, better use of talent, increased motivation and allegiance • Disadvantages-loss of control, decreased goal congruence, increased need for coordination and formal communication, lack of managerial talent
Chapter 11: Responsibility Budgeting
Responsibility Center • An organizational unit formally given the responsibility to carry out one or more tasks or achieve one or more outcomes, or both. • Types of responsibility centers: 1. Service centers 2. Cost centers 3. Profit centers 4. Investment centers
Types of Responsibility Centers
Types of Responsibility Centers
Chapter 11: Responsibility Budgeting
Chapter 11: Responsibility Budgeting
Chapter 11: Responsibility Budgeting
Example 1
Example 2
Solution
Measuring Performance Basic Attributes: • Responsibility-Duties and obligations of a responsibility center • Authority-Power to carry out a given responsibility • Accountability-Extent to which there are consequences, positive and negative attached to carrying out responsibilities
Chapter 11: Responsibility Budgeting
Budget Variances Difference between what is budgeted and what actually occurred. • Revenue variances-positive called favorable • Develop a Flexible Budget Estimate for Revenues • Calculate the Revenue Variance Due to Changes in Volume Rate • Expense variances- • Identify the Amount of Variance Due to fixed costs • Develop a flexible Expense Budget • Calculate the Expense Variance due to Volume
Example 3
Chapter 11: Responsibility Budgeting
Chapter 11: Responsibility Budgeting
Chapter 11: Responsibility Budgeting
Chapter 11: Responsibility Budgeting
Chapter 11: Responsibility Budgeting
Example 4
Solution:
Chapter 11: Responsibility Budgeting
Beyond Variances • Revenue Attainment • Cost Containment • Revenue Enhancement • Cost Avoidance
Beyond Variances
Other Financial Measures • Compensation Systems • Salary Based Compensation System • At Risk Compensation System • Mixed Compensation System • Compensation System Design
Chapter 11: Responsibility Budgeting
Summary • Decentralization a growing trend • Advantages and disadvantages to decentralization • Responsibilities centers include: service, cost, profit and investment • Variances must be tracked and cause determined • Compensation systems must be reviewed

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Chapter 11: Responsibility Budgeting

  • 2. Learning Objectives • Defining decentralization and its advantages and disadvantages • Identify the major types of responsibility centers in health care organizations • Explain the relationships of responsibility, authority and accountability • Compute volume and rate variances for revenue • Compute volume and cost variances for expenses
  • 3. Decentralization • Degree of dispersion of responsibility within an organization • Advantages-More efficient use of time, more relevant info, higher quality decisions, greater speed, better use of talent, increased motivation and allegiance • Disadvantages-loss of control, decreased goal congruence, increased need for coordination and formal communication, lack of managerial talent
  • 5. Responsibility Center • An organizational unit formally given the responsibility to carry out one or more tasks or achieve one or more outcomes, or both. • Types of responsibility centers: 1. Service centers 2. Cost centers 3. Profit centers 4. Investment centers
  • 14. Measuring Performance Basic Attributes: • Responsibility-Duties and obligations of a responsibility center • Authority-Power to carry out a given responsibility • Accountability-Extent to which there are consequences, positive and negative attached to carrying out responsibilities
  • 16. Budget Variances Difference between what is budgeted and what actually occurred. • Revenue variances-positive called favorable • Develop a Flexible Budget Estimate for Revenues • Calculate the Revenue Variance Due to Changes in Volume Rate • Expense variances- • Identify the Amount of Variance Due to fixed costs • Develop a flexible Expense Budget • Calculate the Expense Variance due to Volume
  • 26. Beyond Variances • Revenue Attainment • Cost Containment • Revenue Enhancement • Cost Avoidance
  • 28. Other Financial Measures • Compensation Systems • Salary Based Compensation System • At Risk Compensation System • Mixed Compensation System • Compensation System Design
  • 30. Summary • Decentralization a growing trend • Advantages and disadvantages to decentralization • Responsibilities centers include: service, cost, profit and investment • Variances must be tracked and cause determined • Compensation systems must be reviewed