Suppose you are asked to do a cash flow budget for the next 12 months for a newly opened baby health clinic. The budget must be done on a month-by-month basis. As the clinic has just opened you have no historical accounting data. The clinic is allowed to treat both private (fee paying) and public (no fee charged) patients.

Suppose you are asked to do a cash flow budget for the next 12 months for a newly opened baby health clinic. The budget must be done on a month-by-month basis. As the clinic has just opened you have no historical accounting data. The clinic is allowed to treat both private (fee paying) and public (no fee charged) patients.

Outline the steps you would take, the type of questions you would need to ask and any assumptions you would need to make to develop the budget. Highlight the main areas of concern you would have about the accuracy of your forecasts – in particular, would you be more confident about your revenue or expense forecasts?

Question 2: Cavalier Skilled Nursing Homes is considering setting up a new medical facility. Management estimates that it will cost $1.5 million to purchase the necessary equipment and renovate the building to support its long term care services. The projected net cash flows generated by the new facility over the next five years are given below:

Year 1 -0-

Year 2 $380,000

Year 3 $400,000

Year 4 $420,000

Year 5 $440,000

Assuming a five year life and an 8% cost of capital, compute the net present value of this proposal. On the merits of your net present value computation, should Cavalier Skilled Nursing Homes invest in this project? Explain your answer.

Question 3: Painless Dentists (Painless) expected to treat 6,000 patients during 2011. The practice expected each patient to need an average of 3 X-rays at a cost to Painless of $11 per X-ray. Painless charges Patients $20 for each X-ray. The actual activity reports for 2011 showed that 5,500 patients came to the clinic and received an average of 3.25 X-rays with an average per X-ray cost of $10.50. For this question there is no need to do an adjusted budget, simply do the difference between the actual and budgeted figures.

a. What is Painless’ revenue variance? Is the total revenue variance favourable or unfavourable? Why?

b. What is Painless’ expense variance? Is the total expense variance favourable or unfavourable? Why?

c. Was the net impact of the two variances helpful or harmful to the economic health of the organisation? Why?

Question 4: Rotary Hospital’s static nursing labour expense budget for the month of November 2012 was $64,800 (1,200 patients * 1.5 nursing labour hours per patient * $36 per nursing labour hour). During the month of November 2012 Rotary Hospital actually cared for 1,300 patients. The actual nurse labour expense for the month was $84,175 and 2,275 nursing hours were actually worked.

Calculate Rotary Hospital’s total variance between its budget and actual nurse labour expense. How much of this variance was due to:

a. actual patient numbers being different from the budget?

b. the hourly cost of nursing services being different from budget?

c. the number of nursing hours used being different from budget?

d. what factor caused the biggest difference between the actual and budgeted figures?

Explanation & Answer

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