If this year’s volume and mix of patients were to stay the same as last year, the hospital would face an operating loss of $13 million out of a $200 million budget. Our investments earnings would cover $2.5 million of this, so we needed a plan to come up with the remaining $10.5 million.
The speaker was Douglas Grant, Executive Vice President and Chief Financial Officer of North Lake Medical Center (NLMC). Mr. Grant was hoping that the hospital’s budgeting and control system would succeed in helping to bring about the changes needed to correct the looming deficit. He knew that the hospital could not increase its prices by more than 5 percent, yet expenses were up by over 11 percent, and nursing expenses alone had increased by 18 percent.
1.What kinds of responsibility centers are the divisions? The ancillary (or support) departments? Is the responsibility center design a good one? If not, what changes should be made?
2How does the Department of Pediatrics build its budget? Please be specific, using the exhibits as references.
3.How does the Chemistry Lab build its budget? How does its budget relate to the budgets prepared by the divisions?
4.What options are available to a division in NLMC to reach its contribution objectives? How do these options differ between a clinical department (such as pediatrics) and an ancillary department (such as the chemistry lab)? How does the choice of responsibility centers affect these options?
5.What changes, if any, should Mr. Grant make to the budgeting and control system?