VARIANCE AND BOTTLE-NECK ACCOUNTING
DR. DAVID E. MARCINKO MBA MEd CMP
Any healthcare organization usually has several processes involved in the utilization of its patient services. Unfortunately, bottlenecks may arise which constrain the amount of services any given healthcare entity can deliver.
Accounting Definition
An accounting “bottleneck” is a process that has a low output and limits total healthcare entity revenues. If a medical business entity wants to increase sales or revenues, it has to solve its bottleneck [ie., access management] problems.
Traditional Variance Analysis Dilemma
With traditional variance analysis [VA], managers and administrators analyze the difference between budgeted patient revenues and actual revenues. Typically, differences between budgeted revenues and actual revenues are analyzed as seen in the example below.
Initially postulated by Horngren and Foster for manufacturing processes, VA can now be modified for medical business entity use.
Example:
Patient Service Units | Contract/UCR Fee | ||||
Budgeted sales revenues | 10,000,000 | * | 1,23 | = | $ 12,300,000 |
Actual sales revenues | 9,000,000 | * | 1,21 | = | $ 10,890,000 |
-/- —————- | |||||
Total variance | $ 1,410,000 |
The actual patient revenue price was lower than budgeted as the unfavorable price variance was: ($ 1,21 – $ 1,23) * 9,000,000 = – 180,000.
Traditional variance analysis however does not point out which of the processes were bottlenecks, which caused the negative volume variance.Thus, a normal variance analysis can’t be used to solve bottlenecks in a clinic, hospital or medical practice.
In bottleneck accounting however, managers and healthcare administrators determine the bottlenecks in a medical organization.And, a bottleneck accounting report shows which process were bottlenecks occur and how much money is lost in each bottleneck.
Example:
Bottleneck Patient Sales Revenues | $ 800,000 |
Bottleneck Dep. II | $ 350,000 |
Other Bottlenecks | $ 80,000 |
+ —————- | |
Total Volume Variance | $ 1,230,000 |
Conclusion:
The managerial accounting modification for “bottlenecks” not only points out the bottlenecks to solve, it also shows which bottleneck is to be handled first.
And so, what are your thoughts on this accounting machination? Please comment.
References: Horngren, C. T. and G. Foster, ‘Cost Accounting, A Managerial Emphasis’, Prentice-Hall, Inc. 1987.
Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com
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