Question

Budgeting Purchases, Revenues, Expenses, and Cash in a Service Organization

Wauconda Medical Center is located in a summer resort community. During the summer months the center operates an outpatient clinic for the treatment of minor injuries and illnesses. The clinic is administered as a separate department within the hospital. It has its own staff and maintains its own financial records. All patients requiring extensive or intensive care are referred to other hospital departments.

An analysis of past operating data for the out-patient clinic reveals the following:

• Staff: Seven full-time employees with total monthly salaries of $56,000. On a monthly basis, one additional staff member is hired for every 500 budgeted patient visits in excess of 3,000, at a cost of $5,000 per month.

• Facilities: Monthly facility costs, including depreciation of $3,000, total $10,000.

• Supplies: The supplies expense averages $12 per patient visit. The center maintains an end-of-month supplies inventory equal to ten percent of the predicted needs of the following month, with a minimum ending inventory of $3,000, which is also the desired inventory at the end of August.

• Additional variable patient costs, such as medications, are charged directly to the patient by the hospital pharmacy.

• Payments: All staff and maintenance expenses are paid in the month the cost is incurrent. Supplies are purchased at cost directly from the hospital with an immediate transfer of cash from the clinic cash account to the hospital cash account.

• Collections: The average bill for services rendered is $80. Of the total bills, 40 percent are paid in cash at the time the service is rendered, 10 percent are never paid, and the remaining 50 percent are covered by insurance. In the past, insurance companies have disallowed 20 percent of the claims filed and paid the balance two months after services are rendered.

• May 30 status: At the end of May, the clinic had $14,000 in cash and supplies costing $4,000.

Budgeted patient visits for next summer are as follows:

Month       Patient visits

June                 2,500

July 3,500

August             4,000

Required

For the Wauconda Outpatient Clinic:

a. Prepare a supplies purchases budget for June, July, and August, with a total column.

b. Prepare a revenue and expense budget for June, July, and August with a total column.

c. Prepare a cash budget for June, July and August with a total column. (Hint: See requirement d.)

d. Explain why you were unable to develop a feasible cash budget and make any appropriate recommendations for management’s consideration.

Thank you in advance!

Answer 1

a) Supplies purchases budget

Supplies Purchases Budget
	June	July	August	Total
Budgeted paitent visits	2,500	3,500	4,000	10,000
Supplies expense	$12	$12	$12
Supplies for the month	$30,000	$42,000	$48,000	$1,20,000
Add: closing inventory	$4,200	$4,800	$3,000	$12,000
Less: opening inventory	$4,000	$4,200	$4,800	$13,000
Purchases of supplies	$30,200	$42,600	$46,200	$1,19,000

b) Revenue Budget

Revenue Budget
	June	July	August	Total
Budgeted paitent visits	2,500	3,500	4,000	10,000
Bill for service	$80	$80	$80
Total revenue	$2,00,000	$2,80,000	$3,20,000	$8,00,000

Expenses Budget

Expenses Budget
	June	July	August	Total
Staff expenses	$56,000	$61,000	$66,000	$1,83,000
Facilities	$10,000	$10,000	$10,000	$30,000
Total expenses	$66,000	$71,000	$76,000	$2,13,000

c) Cash budget

CASH BUDGET
	June	July	August	Total
Opening cash balance	$14,000	-$13,200	$1,400
Add: cash collection
Cash sales	$80,000	$1,12,000	$1,28,000	$3,20,000
			$80,000	$80,000
Total cash collections	$80,000	$1,12,000	$2,08,000	$4,00,000
Total cash available	$94,000	$98,800	$2,09,400	$4,02,200
Less: cash disbursements
Supplies purchases	$30,200	$42,600	$46,200	$1,19,000
Facilities	$7,000	$7,000	$7,000	$21,000
Staff expenses	$56,000	$61,000	$66,000	$1,83,000
Total cash disbursements	$93,200	$1,10,600	$1,19,200	$3,23,000
Excess(deficiency) of available cash over disbursements	-$13,200	$1,400	$88,800
Ending cash balance	-$13,200	$1,400	$88,800

d) The cash buget shows a negative cahs balance in June which should not be a case beucase a company cannot operate without cash. Hence the company should take loan from the bank to operate. This borrowings shoild also be included in the cash budget so that ending cash balance is always positive.