Responsibility BudgetingChapter 11

Learning Objectives

• Defining decentralization and its advantages anddisadvantages

• Identify the major types of responsibility centers in healthcare organizations

• Explain the relationships of responsibility, authority andaccountability

• 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

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

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

Budget VariancesDifference 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

Example 4

Solution:

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

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