Question

Write a 1,200-to 1,500-word paper, which includes a cost variance, in which you complete the following: oDetermine specific strategies to manage budgets within forecasts.oCompare five to seven expense results with budget expectations, and describe possible reasons for variance.oRecommend three benchmarking techniques and identify those that might improve budget accuracy in future forecasts. Justify your choices.•Format your paper consistent with APAguidelines..•Useheadings appropriately to provide organization and structure for your thoughts.

Answer 1

Cost Variance is the difference between a cost's actual amount and its budgeted or planned amount. For example, if a company had actual repairs expense of $950 for May but the budgeted amount was $800, the company had a cost variance of $150. Since the actual cost was more than the budgeted amount, the cost variance is said to be unfavorable. When an actual cost is less than the budgeted amount, the cost variance is said to be favorable.

Strategies to manage budgets within forecasts

1. Keep Budgeting and Forecasting Flexible

Rigid forecasts and budgets aren't very useful. Things change as the year progresses, and you need to be able to factor in those changes and how they will affect your business. Continuing to base decisions on the best guesses made months prior can lead to faulty and costly decisions. In addition, holding employees to metrics based on out-of-date information is counterproductive and frustrating. Building flexibility into your budgeting and forecasting will allow for more accuracy and better results in your business.

2. Implement Rolling Forecasts and Budgets

You can update rolling forecasts and budgets based on present results, not on what a manager thought may happen several months ago. With this process, forecasting is done for the next quarter and not the entire year. Each quarter the forecasts are broader since they too will be updated again. Rolling forecasts allow you to better align your budget with your stated plan while improving the accuracy of your projections.

3. Budget to Your Plan

Have a plan in place and meld your budget to it. Budgeting to your plan "requires that spending decisions be made based on actual revenue, rather than on opportunities that such spending might (or might not) lead to." Instead of spending and dealing with it later, budgeting to your plan forces you to deal with the potential impact any expenditures will have on the business. Implementing this method of handling your budget is really helpful in addressing opportunities that weren't a part of the original budget.

4. Communicate Early and Often

As the forecasting and budgeting affects all aspects of the business, you want to keep an open line of communication with all departments throughout the entire process to help minimize issues and to ensure alignment between your company's operational and organizational strategies.

5. Involve Your Entire Team

Budgeting and forecasting should be a team effort so that departments and units have a clearer understanding of their needs. As well as the people in your finance department, having people with their pulse on the various departments can give you the data you need to make accurate predictions and set realistic budgets. Moreover, using your entire team allows you to have multiple perspectives on where your business is now and where it could be in the future.

6. Be Clear About Your Goals

The purpose of forecasting is to predict your company's financial future. Forecasting aids in the making of business decisions and in understanding their impact before you implement them. If you aren't clear on the overall goals of the company, then your ability to accurately forecast your business's financial future falters. Therefore, you should have a clear understanding of what's driving your forecasting predictions; otherwise, they are just random guesses not grounded in the goals of your company.

7. Plan for Various Scenarios

You can't plan for everything, but you can have an idea of some of the obstacles that could affect your initial forecast and budget. Review external market and economic trends that may negatively impact your company. A rolling forecast is helpful for staying on top of any changes, negative or positive, that could have a serious impact on your business. Rolling forecasts also allow you to pivot as needed based on any new data presented so all decisions are based on what's happening now and not on what happened the previous year.

8. Track Everything

Everything needs to be accounted for when budgeting and forecasting for the upcoming fiscal year, whether it's the potential buyout of a competitor or just of the office supplies. Don't underestimate the importance of seemingly minor details and their ability to affect the company's financial health. Once a budget is in place, allow for forecasting that looks at the many potential scenarios that may occur. Keep eyes and ears on market trends, client behaviors, and what the competition is up to as the business forecast is being finalized.

9. Include Profit and Cash Flow Goals

Author Gene Siciliano says, "Every budget should have profit targets and cash flowtargets because the two bottom line measures are very different, and they require different kinds of attention to control them." If you're not keeping track of these two important metrics of your business, how useful and accurate will your budget be? To keep your company from missing its financial goals, set realistic targets for both your cash and profit flow.

10. Let Excel Go

Don't rely on Excel or other spreadsheet software to do your budgets and forecasts. Planning software can go a long way in making the process easier and less time consuming. Cloud-based systems have quickly become the standard for all areas of finance, not just bookkeeping services. When implemented, they allow for more flexibility, as well as better security and cost savings, than manual options. They allow you to generate accurate predictions and budgets quickly and with minimal errors.

Expense Results: Budget Expectations and Variances

“Variance analysis is the aspect of budgeting in which actual results are compared with budgeted expectations”. Nurse managers have planned or expected results and actual results that cause a variance in the budget. “Implementation of the budget, however, does not mean that everything will come out according to plan”. One expense result with budget expectations is volume of patients. Using historical data to forecast nurse managers can prepare for an expected volume of patients for the coming year. However, variances occur when expected volume is either under or overestimated for each department and the organization. “Recognition of seasonal, weekly, and daily patterns of variation in volume can in fact create significant opportunities for cost reduction”.

Another expense results with budget expectations are staff and scheduling. Health care organizations require specific amounts of staff to function daily. Nurse to patient ratios, if state law requires, for safe treatment and quality of care for patients is the expectation. The variance occurs when predicted staff levels are either over or underestimated. Forecasting can anticipate the patient acuity levels and busy seasons; however, it is not an exact science and can be inaccurate. Staffing and scheduling can vary resulting from increased or decreased patient occupied beds. The variance may cause nurses to be called in off-duty resulting in overtime or nurses to be placed on call resulting in having to use vacation or sick hours to maintain full time status.

“Cost variance analysis is of great potential importance to the health care industry. Successful use of cost variance analysis requires a sound system of standard setting, or budgeting, and a related system of cost accounting”. Nurse managers are also required to prepare a budget for supplies necessary to maintain daily operations in his or her respective departments. Supply inventory is another expense result with budget expectations. Variances occur when either forecasting determines that the previous year used a set number of supplies and the present year is either over or under using those supplies. Variances may also occur when the previous year had a standard cost for supplies, yet suppliers raised the cost per units of the supplies, causing and actual cost to be higher than the expected cost. Both variances may cause alterations to departmental and organizational budgets. “The primary reason for cost change at the departmental level between two periods can be stated as a function of the following three factors: 1. Changes in input services, 2. Changes in input productivity (efficiency), and 3. Changes in departmental volume”.

Three Benchmarking techniques to improve Budget accuracy

Budgeting / Estimating accuracy is the degree to which a calculation of an item varies to its actual value. As estimators, we want to minimize the gap between the estimated and the actual cost. Of course there are a lot of factors involved here. We have to take into account things like the scope of the project, the available information, its phase in the project lifecycle and turbulent market conditions. This article however provides you with three general tips to increase the accuracy of your estimates:

1. Create a cost database

When it comes to the accuracy of your estimates, the information you use as input is very important. But where do you find the right information? At Cost Engineering we have built an extensive cost database (Cost Engineering Standard Knowledgebase), based on industry standards, historical data from completed projects and requested quotations. But the market place is constantly in motion, therefore it is important to keep your data up-to-date. One way to do this, is by regularly indexing your equipment or material cost.

2. Integrate risk analysis into your estimates by adding contingencies

Individual projects should have their accuracy ranges determined by a cost risk analysis study. From the resulting output of the risk analysis, the project budget should be derived, based on the level of confidence (or risk) acceptable to management. From there we can define the contingencies. Estimate contingency is the amount added to the estimate in order to provide the desired level of confidence.

3. Use a dedicated cost engineering software tool

As mentioned before, using a well-developed cost database will increase the accuracy of your estimates. But how do you manage such a great amount of data? The use of a dedicated cost engineering software tool in this case is indispensable. For example Software, Cleopatra Enterprise, achieves this by using a single central database in which all facets involved in costing are managed.

Standardization also reduces the time spend merging and analyzing the individual outputs from different sources. Furthermore, multiple disciplines can make use of the same estimating tool. This allows the central estimate group to quickly and accurately check estimate data from multiple disciplines.

Last but not least, the unique cost management feature in Cleopatra Enterprise, provides the estimator with a tool to directly benchmark their estimate against actual cost. By closing the loop between estimating and project controls the estimating accuracy will eventually increase.