The Prairie Children's Clinic Is Located in a Small Rural

question 107

Essay

The Prairie Children's Clinic is located in a small rural town in Saskatchewan. It draws from a wide area, though, because it is the only children's clinic in this part of the Province. The clinic is usually busier during the summer than during any other time because parents bring children in for annual physical examinations and for follow-up on other problems while children are out of school. A new director was recently hired, and among the new ideas he introduced were responsibility accounting and monthly cost reports supplied to department heads. Previously, cost data had rarely been presented. Here is part of the report received by the Information Systems department:
To: Department Heads
From: Prairie Children's Clinic Business Manager
Beginning this month, you will receive monthly reports comparing the costs of operating your department with budgeted costs. The reports will highlight the differences (variations)so you can identify problem areas in your department. The budget variances will help you identify what costs are out of line. Of course you will want to pay attention to the largest variances as they are likely the most important. The first report is attached. Please look it over and get back to me by next Thursday with information regarding your variances.
Prairie Children's Clinic
PERFORMANCE REPORT-INFORMATION SYSTEMS
July 20x6
(Over)(Over)
Under Under
Budget Actual Budget Percent
Number of visits 1,200 1,500 (300)(25)%
Costs:
Staff salaries $ 4,500 $6,250 $(1,750)(39)
Supplies 550 750 (200)(71)
Supervisor's salary 2,150 2,750 (600)(28)
Allocated administrative costs 1,000 1,200 (200)(20)
Equipment amortization 600 650 (50)(8)
Total Costs $8,800 $11,600 $(2,800)(32)%
Comments: Costs are significantly above budget for the month. Particular attention needs to be paid to staff and supervisors' salaries, and supplies.
The annual budget for 20x6 was constructed by the new administrator, based on an average of the prior three years' costs. During this three-year period, all costs had increased each year, with more rapid increases between the second and third year. Once he developed the average, he deducted 2% to encourage department heads to better control costs. Monthly budgets were calculated as one-twelfth of the annual budget. The budgeted patient visits were the average number of visits per month for the last year.
a)Describe static and flexible budgets and identify what type of budget this is.
b)Actual prices for supplies were expected to be about 10% above the levels in the budget above. Because of increasing volumes, a part-time staff person was hired during the period. In addition, the department head received a salary increase. Prepare a flexible budget for performance evaluation of the head of the Information Systems department, and calculate the budget variances for the period. Assume that any variable costs vary with the number of visits.
c)Explain why the flexible budget is a better benchmark for the Information Systems department at Prairie Children's Clinic than the static budget developed by the clinic director.

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