Performance Management Student’s Name Institutional Affiliation Course Professor’s Name Date Table of Contents Question 1 ...................................................................................................................................... 3 The costing approach currently used by Cathal’s Private Hospital ............................................ 3 Activity based costing (ABC) ..................................................................................................... 3 Comments.................................................................................................................................... 5 Question 2 ...................................................................................................................................... 5 Incremental (Traditional) Budgeting ........................................................................................... 5 Activity Based Budgeting (ABB) ............................................................................................... 6 Question 3 ...................................................................................................................................... 7 Calculations for Cash Budget ...................................................................................................... 7 Cash Budget ................................................................................................................................ 9 Purpose of budgeting for Tab Ltd. ............................................................................................ 10 The behavioural aspects of budgeting in a company like Tab’s Ltd. ........................................ 10 References .................................................................................................................................... 12 Question 1 The costing approach currently used by Cathal’s Private Hospital Currently, CPH uses the traditional costing approach that allocates overhead costs of the hospital on the basis of the patient’s average length of stay in the hospital (ALOS). Under this approach, the rate of allocation for the hospital overheads is computed as; The rate of allocation = Total budgeted hospital overheads for the year / Total budgeted ALOS for all patients for the year 𝑇ℎ𝑒 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑎𝑙𝑙𝑜𝑐𝑎𝑡𝑖𝑜𝑛 = €4,801,226 = €205.4 𝑝𝑒𝑟 𝑑𝑎𝑦 𝑜𝑓 𝐴𝐿𝑂𝑆 23,375 days Therefore, the allocated costs for each of the two surgeries will be; Allocated costs for the knee surgeries = the rate of allocation per day of ALOS * ALOS for knee surgery = €205.4 𝑝𝑒𝑟 𝑑𝑎𝑦 ∗ 3.5 𝑑𝑎𝑦𝑠 = €718.90 Allocated costs for the hip surgeries = the rate of allocation per day of ALOS* ALOS for hip surgery = €205.4 𝑝𝑒𝑟 𝑑𝑎𝑦 ∗ 4.2 𝑑𝑎𝑦𝑠 = €862.68 The total costs for each of the surgeries using CPH’s current costing approach will be; Knee surgery Hip Surgery €425 €960 €718.90 €862.68 €1143.90 €1,822.68 Direct materials costs Allocated hospital overhead costs Total Costs Activity based costing (ABC) First, the cost allocation rates for the various categories of activities are computed as; Activity Activity Cost (€) Cost Driver Cost allocation rate =Activity Cost/Cost Driver X-ray department costs 1,008,320 6,302 €160 per X-ray 960,267 8,314 €115.5 per meeting Operating theatre costs 1,104,430 9,154 €120.65 per hour Physiotherapy costs 624,143 15,223 €41 per session Occupational therapy 528,106 15,003 €35.2 per session 575,960 23,375 €24.64 per ALOS day Hospital consultant costs costs Sundry hospital costs Using the cost allocation rates for the different activities and the usage of cost driver for the two types of surgeries in CPH, the activity costs allocated for each type of surgery are computed as shown below. Activity Costs = usage of cost driver * cost allocation rate Activity Cost allocation rate Knee Surgery Hip Surgery Usage of Activity Usage of Activity cost driver Costs cost driver Costs €160 per X-ray 2 €320.00 5 €800.00 Hospital €115.5 per 2 meetings €231.00 4 meetings €462.00 consultant costs meeting Operating theatre €120.65 per 1.25 hours €150.81 2 hours €241.30 costs hour Physiotherapy €41 per session 4 sessions €164.00 5 sessions €205.00 Occupational €35.2 per 3 sessions €105.60 5 sessions €176.00 therapy costs session Sundry hospital €24.64 per 3.5 days €86.24 4.2 days €103.49 costs ALOS day X-ray department costs costs Total Activity Costs €1,057.65 €1,987.79 Therefore, the total costs for each of the two surgeries using ABC will be; Knee surgery Hip Surgery €425.00 €960.00 Allocated overhead costs €1,057.65 €1,987.79 Total Costs €1,482.65 €2,947.79 Direct material costs Comments From the calculations above, it is evident that the hospital overhead costs allocated for each type of surgery increase under the activity based costing approach. The knee surgery allocated costs increase from €718.90 to €1,057.65, whereas the allocated overhead costs for hip surgery increase from €862.68 to €1,987.79. The increase in allocated costs for hip surgery is more significant with a €1,125.11 increase. The increase in overhead costs for the hip surgery is more significant than the increase recorded for knee surgery because hip surgeries use a greater proportion of the activities, hence higher activity costs. This is because under the current approach, CPH uses only ALOS as the cost driver to allocate overhead costs. In contrast, the ABC approach applies different cost drivers and usage of cost drivers to allocate overhead costs for the various activities in the hospital. As a result, the ABC costing approach provides are more detailed and accurate results as compared to the current approach being used by CPH. Question 2 Incremental (Traditional) Budgeting Incremental budgeting is a traditional method of budgeting where the current year’s budget is prepared by considering the previous year’s exact spending and performance. The incremental amounts such as adjustments for inflation or increase in costs are added to the current year’s amount to compute the budget (Campos & Rodrigues, 2016). First and foremost, incremental budgeting is advantageous due to its simplicity. This is because when computing a budget using the traditional budgeting method, the company does not need to rethink the items on the budget. Rather, under incremental budgeting, the company adjusts the spending for the previous year according to inflation, customer demand, revenue growth and market situations. Secondly, incremental budgeting saves time for the company (Campos & Rodrigues, 2016). Under this budgeting, the company is only required to assess its previous spending habits and performance to determine how they will budget their expenses and revenues for the current year. Thirdly, incremental budgeting requires less preparation costs, since the process is easy, simple and less time consuming. Last but not least, incremental budgeting enables the managers to detect the impact of change quickly by comparing the previous year’s budget and spending. However, incremental budgeting has some drawbacks such as the managers do not have to justify their expenses since it focuses on past performance to plan for the future. This could result in challenges for businesses that are rapidly changing (Campos & Rodrigues, 2016). Incremental budgeting also assumes that all current activities and expenses will be needed in the future period, without carefully evaluating if they are necessary. Using the previous year’s spending and income as a base when creating the budget could also result in problems because the factors can either be controllable or uncontrollable. Schools could use incremental budgeting to budget staff salaries since its quick, simple and easy to apply. Incremental budgeting does not require a detailed evaluation, hence it makes it easier for the school’s management to work on other issues. In addition, schools do not have complicated accounts, hence it will be easier to apply the traditional budgeting method. Activity Based Budgeting (ABB) Activity based budgeting (ABB) is a budgeting method where any activities within the company that incur expenses are recorded, researched and evaluated. Through the method, all activities that incur costs are crucially evaluated to identify ways to establish efficiencies in the company and the budget is generated based on the outcomes (Pietrzak, 2014). ABB is beneficial for companies as it helps to reduce operational and administrative expenses for companies, which helps them generate more profits from their sales. It does this by evaluating the external cost drivers for operational activities. However, activity based costing is expensive and time-consuming. This is because the managers are required to evaluate all the costs associated with business activities in the company. For companies with complex production processes, this could be difficult and require the company hire professional expertise. Activity based budgeting could be used by companies going through changes like new subsidiaries, products, geographical locations for the business and customers(Pietrzak, 2014). This is because historical financial information used in incremental budgeting may be invaluable in creating future budgets due to the material changes. Newer companies could also use activity based budgeting since they lack historical information on the firm’s performance. Question 3 Calculations for Cash Budget Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Collection from sales Credit sales for 1,800,000 2,000,000 1,800,000 2,200,000 2,500,000 2,800,000 1,080,000 1,200,000 1,080,000 1,320,000 1,500,000 1,680,000 720,000 800,000 720,000 880,000 1,000,000 1,120,000 720,000 800,000 720,000 880,000 1,000,000 1,600,000 1,880,000 2,120,000 1,250,000 1,400,000 the month Less: 60% of the receivable Closing balance for the month Opening balance Total Collection Payment for Medical Products Purchased Total 900,000 1,000,000 900,000 1,100,000 purchases (1,800,000 (2,000,000 (1,800,000 (2,200,000 (2,500,000 (2,800,000 Cash paid to *50%) *50%) *50%) *50%) *50%) *50%) 720,000 800,000 720,000 880,000 1,000,000 1,120,000 180,000 200,000 180,000 220,000 250,000 280,000 180,000 200,000 180,000 220,000 250,000 creditors in the month is 80% Closing purchases Remaining 20% are paid in the second month after receipt Total payments 400,000 470,000 530,000 for medical product purchased Payment for Wages Current month 1,800,000 2,000,000 1,800,000 2,200,000 2,500,000 2,800,000 360,000 400,000 360,000 440,000 500,000 560,000 440,000 500,000 560,000 sales 20% on sales Total payment for wages Payment for administrative expenses Salaries = 40,000 40,000 40,000 40,000 40,000 40,000 55,000 55,000 55,000 55,000 55,000 55,000 30,000 30,000 30,000 30,000 30,000 30,000 25,000 25,000 25,000 25,000 25,000 25,000 Rent 20,000 20,000 20,000 20,000 20,000 20,000 Total admin 170,000 170,000 170,000 170,000 170,000 170,000 170,000 170,000 170,000 (480,000/12)=4 0,000 Promotion=(66 0,000/12) =55,000 Insurance =(360,000/12) =30,000 Utilities =(300,000/12) =25,000 expenses Corporation =(40%*61 tax payment 2,000) =244,800 Cash Budget CASH BUDGET FOR THE SECOND QUARTER 2022 Tabs Ltd. Particulars Beginning cash April May June 100,000 417,200 833,200 Collection from sales 1,600,000 1,880,000 2,120,000 Total Receipts 1,700,000 2,297,200 2,953,200 balance Cash Inflows/Budgeted Cash Receipts Budgeted cash 8 payments/Cash Outflows Payment for medical 400,000 470,000 530,000 Payment for wages 440,000 500,000 560,000 Payment for 170,000 170,000 170,000 244,800 - - 28,000 324,000 - - - 8,000 Total Payments 1,282,800 1,464,000 1,268,000 Net Cash Flow 417,200 833,200 1,685,200 products purchased administrative expenses Corporation tax payments Payment made for equipment and warehouse facilities Payment for interest loan Ending Cash 417,200 833,200 1,685,200 Balance Purpose of budgeting for Tab Ltd. Budgeting is essential for the success of all businesses as it involves setting goals, plans and targets for a specific period of time, especially a future period. The main purpose of budgeting is to help Tabs Ltd. plan and control its finances against the business operations of the company. This will help Tabs Ltd. To achieve its short-term and long-term objectives by monitoring actual expenses and revenues against the budgeted financials to monitor business performance (Gulpenko et al., 2017). In addition, it will enable Tabs Ltd. to make confident and well-informed financial decisions based on the budgeted amounts as it acts as a decision-making tool. Budgeting also acts as a forecasting tool for the profitability of Tabs Ltd in the future in relation to expenditure and income. It will ensure that Tabs Ltd. meets all its financial commitments with the available funds. Furthermore, budgeting ensures that the company has additional funds to finance its future projects when need arises. The behavioural aspects of budgeting in a company like Tab’s Ltd. The behavioural aspects of budgeting in a company like Tabs Ltd is that budgets are considered to be difficult by employees if managers fail to involve them in preparing the budgets for the company. It is because lack of participation in preparing the budget may influence resent and stress out employees since they may not understand the targets of the budget. This means that managers responsible for creating budgets in Tabs Ltd. should establish ways of encouraging and maintaining positive relationships with their employees. Encouraging employee participation and support is essential in achieving the results and targets of the budget (Raghunandan et al., 2012). However, the level of employee participation depends on the budgeting approach that will be used by the budget managers. Another behavioural aspect of budgeting is that targets of a budget could fail to challenge the company’s objectives by hindering developments. The possibilities of the budget managers establishing targets that do not create challenges is high when they prioritize achievement of financial goals. To fix such a challenge, the managers will need to use historical information as a reference when creating budgets for the company to improve their performance and understand future possible economic circumstances. This aspect allows managers to establish realistic goals and targets focused on the overall long-term success of a company. Flexible budgeting capabilities is also another behavioural aspect of budgeting. This is because budget managers could disregard the actual performance relating to the business operations. The flexible budgeting aspect encourages budget managers to focus on the accuracy of financial plans and make adjustments when necessary for the success of the business. It also encourages Tabs Ltd. to analyse the financial performance of their company regularly to ensure it is meeting the budgeted expectations. References Campos, C.M.P., & Rodrigues, L. (2016). Budgeting Techniques: Incremental Based, Performance Based, Zero Based, and Priority Based. Global Encyclopedia of Public Administration, Public Policy and Governance. 1-10. https://doi.org/10.1007/978-3-31931816-5-2263-1 Gulpenko, K., Tumashik, N., Filiasova, Y., & Ritman, N. (2017). Budgeting fundamentals analysis for the purposes of organizational budgetary policy development. MATEC Web of Conferences, 106. https://doi.org/10.1051/mateconf/201710608102 Pietrzak, Z. (2014). Traditional versus Activity-based Budgeting in Non-manufacturing Companies. Social Sciences, 82(4). https://doi.org/10.5755/j01.ss.82.4.6604 Raghunandan, M., Ramgulam, N., & Mohammed, K.R. (2012). Examining the Behavioural Aspects of Budgeting with Particular Emphasis on Public Sector/Service Budgets. International Journal of Business and Social Science, 3(14).110-117. www.ijbssnet.com Name: Description: ...