SALARY AND WAGE MANAGEMENT AND THE LABORATORY BUDGET

true

TRUE OR FALSE: Labor costs (salaries and wages) represent the largest single item in the laboratory budget.

1. institutional

2. technical

3. an accounting and budget perspective

Three approaches are available to analyze labor costs:

Institutional Labor Cost Evaluation

which examines personnel in terms of employment relationships

1. Recruitment and acquisition costs

2. Training or developmental costs

3. Productive or operational periods

4. Costs associated with the termination and separation of employees from the institution.

From an organizational viewpoint, the employment cycle has four major stages:

false

TRUE OR FALSE: many personnel experts claim that an employee must remain with a company for at least 2 years before hiring costs are recovered.

Technical Evaluation of Labor Cost

• which looks at work flow and tasks performed

• seeks to identify and assign labor costs to the production activities that actually generate the expenses; this enables the manager to make informed personnel utilization decisions.

1. Preanalytical time

2. Analytical time

3. Postanalytical time

To determine the direct labor costs involved in the technical performance of a laboratory procedure, the National Committee for Clinical Laboratory Standards has proposed the following guidelines:

Accounting and Budgeting Labor Analysis

This division allows many financial and managerial performance indexes to be computed and specific operational parameters to be measured.

• total number of hours paid

• actual hours worked

• hours paid as benefits

In a financial model, salary and wage cost behavior is separated into three categories:

• Total (paid) hours

• Productive (worked) hours

• Nonproductive (benefit) hours

Using the accounting and budgeting labor cost model, payroll hours are grouped into the following categories:

Total (paid) hours

equal the total number of hours for which an employee is paid; this includes actual time spent in the laboratory as well as benefit hours paid.

Productive (worked) hours

equal the actual hours worked, including overtime; the time that an employee is involved in education or training is usually counted as productive hours.

Nonproductive (benefit) hours

equal the hours for which the employee is compensated but not available for work. Sick time, vacation, jury duty. and bereavement time are examples of nonproductive hours.

calculation of full-time equivalents (FTES)

• can be used for setting and measuring budgeting and staffing goals.

• to calculate, divide the number of hours (total, productive, or nonproductive) by 2080, the number of hours a full-time person works in 1 year

• examining a productivity model

• billable procedures

• weighted workload systems

Productivity can be evaluated by?

Labor unit

• is a unit of time in minutes or hours.

• for salaried employees, it can be measured as a 40-houe workweek standard

• Hours paid per patient day or daily census

• Hours paid per outpatient and emergency room visit

• Hours paid per number of billable laboratory procedures

• Hours paid per weighted workload unit

The most common measurements of productivity use one of the following baselines as the workload unit:

billable procedure

• is a test for which the laboratory may issue a charge.

• This statistic is easily obtained from financial records, and it allows an apples with-apples comparison at the bottom of the economic line.

Weighted Workload Labor Estimation Techniques

A system that assigns a value (usually in a unit defined as 1 minute) to a specific task performed in a standardized manner, obtained by analyzing and timing each step in the production or performance process.

1. Expert opinion

2. Simulation

3. Log (diary) book

4. Time-motion study

Four main methods used to analyze and measure workload and develop factors with which to calculate productivity within a weighted model:

Expert opinion

A person knowledgeable in the field makes an estimate of time necessary to perform an activity.

Simulation

A technologist performs a specific test to determine the time needed.

Log (diary) book

• The technologist records each step involved in the testing procedure in a log over a designated period of time.

• This record shows the work period (shift or time of day), instrumentation, and other important factors such as the experience of the technologist.

Time-motion study

A person with special training in management engineering either directly observes the person working or develops special logs where the steps in a process can be recorded, along with the time involved. The CAP workload system used this method.

true

TRUE OR FALSE: The more accurate the data collection procedure, the more cumbersome and time consuming.

1. It can be used as an example of a weighted workload model with which many laboratorians may be familiar

2. some regulatory and industry reporting programs may still be requiring these figures until an acceptable substitute is found

3. it may take some time before examinations for laboratory supervisors drop these questions from their tests.

A brief discussion of the discontinued CAP WLU system is included in this case for three reasons:

Cap Workload System

used time studies to collect the statistics needed to assign weighted unit values to the performance of laboratory procedures.

Workload units (WLU)

were defined as a value (1 unit 1 minute) assigned to a test that is performed by a specific methodology

1. a document that lists every position authorized along with the name of the individual filling each job, maintained and monitored by personnel and payroll

2. the normal reports associated with the budgeting process using financial and accounting information.

Salary budgeting projections consist of two processes:

Position Control Master

• A detailed list of the authorized positions and the person assigned to each slot is maintained by the personnel department as a part of the budgeting and hiring process.

• ensures management control of the hiring process.

• is consulted to identify the opening and determine authorization to fill the position.

Operational budget

• deals with the process of planning for the laboratory as an ongoing business concern, accounting for everyday needs and expenditures.

• It represents the financial parameters of the laboratory's goals for the coming year.

Capital budget

• covers specific equipment acquisitions and building projects that require major financial commitments.

• Plans for the acquisition and completion of specific equipment and building projects that require major financial commitments.

1. Forecast/Projection Method

2. Flexible Budgeting

3. Zero-Based Budgeting

Types of Operational Budgets:

Forecast/Projection Method

• Within this framework, different budgeting strategies have been proposed to meet the rapidly changing, dynamic nature of business organizations.

• However, all types of budgets continue to depend on the tools and techniques used in the forecast/projection method.

• Under this method a budget is prepared based on a forecast of what is expected to occur during the next period.

• This process makes projections of the increases or decreases that will occur on each line item in the budget based on historical information and adjustment for anticipated changes, such as inflation or nature of the business.

Flexible Budgeting

• This system tries to set expenditures based on a variable workload volume.

Zero-Based Budgeting

• Analyzes needs based on prioritizing of goals and objectives, not on past allocations

• This procedure has had some success in setting priorities of large governmental and educational institutions.

• However, even in those cases some method of predicting how much an activity will cost is necessary, and historical data are the most dependable source of information.

1. Time Frame

2. Forecasting Stage

3. Scheduling Stage

4. Synthesis of Information

Four issues must be addressed in preparing an operational budget

TIME FRAME

• The annual budget, which covers 1 year or budget cycle, is the main working guideline for management. Budgets are also frequently prepared to cover other periods

• Long-term budgeting, however, is a tremendous help to the manager in planning the direction and long-term needs of the laboratory.

• can also involve different dates. A budget cycle developed on a fiscal year may cover any 12-month period.

FORECASTING STAGE

Although most projections of future business activity are based on the extrapolation of historical data, several factors must be considered in all forecasts:

• Shifts in patient mix or volume

• Changes in medical staff composition

• Changes in business parameters such as inflation and reimbursement rates

• Expansion or cutbacks in services offered by the hospital or laboratory

• Population fluctuations brought about by changes in the local economy.

  If these factors are incorporated into forecasts based on historical information, a more realistic and predictable budget can be prepared.

SCHEDULING STAGE

• The budget preparation schedule varies from facility to facility.

• The document must go through several drafts, numerous meetings and negotiation sessions, and many revisions. For this reason, most institutions start the process about 6 months before the beginning of the new budget year.

SYNTHESIS OF INFORMATION

How the financial information is organized is very important. It must be presented logically, in a way that is useful to the manager and the organization. To provide this information in an orderly manner, the budget report is usually organized into three major parts:

• Revenue and volume figures

• Itemized cost categories

• FTEs and labor hours

Review of Budgeting Procedures

This section summarizes the budgeting procedures covered in the preceding chapters on revenue, salaries and wages, and costs.

• actual costs

• ratios

• percentage calculations

Three methods of obtaining future budgeting figures, based on revenue or volume projections. These figures are then used to prepare the pro forma budget, that is, the budget extrapolated from historical data. The pro forma calculations are used to determine the budget level for all other items.

1. Develop a prediction of future volume

2. A ratio can be calculated between the cost item and revenue or volume

3. Some budget items have predetermined costs

4. Expense items can be compared to the revenues of the department and a percentage calculated to project future relationships

The following steps and techniques are available for budget preparations:

Develop a prediction of future volume

• Once this is done, percentage and ratios calculations can be performed to project future economic activity.

• This forecast is usually done by applying a growth factor to the volume generated in the past. The growth factor includes expected increases in volume and changes in services or patient base.

A ratio can be calculated between the cost item and revenue or volume

• An example is using the projection of testing volume as an indicator of volume along with currently available financial data.

• This information is then used to calculate an index for cost of supplies for the coming year.

• This is obtained by dividing supply expense by the number of procedures performed. The resulting factor may then be used to obtain the cost of supplies in the next budget cycle once an estimate of patient days has been determined.

Some budget items have predetermined costs

Instrument leases and service agreements are examples of items with fixed known costs for the coming year.

Expense items can be compared to the revenues of the department and a percentage calculated to project future relationships

For example, the cost of supplies may represent 17 percent of the revenues of the laboratory; this information can be used to project costs in the coming budget year.

Pro Forma Budget

a budget based on the extrapolation of historical data.

management control of the financial resources of the organization

The major objective in preparing a budget is?

Capital

refer to the monetary needs of the institution

Capital items

are purchases or projects that meet specific guidelines of time, price, and purpose.

Time criteria

The time frame of capital items is 1 year. If a product provides service for more than 1 year, it meets this criterion; if less, it is usually expensed during the year of acquisition

Price criteria

The dollar value of a project also determines whether it is budgeted as a capital item or expensed. The cutoff amount varies widely and depends on the accounting policy of the business.

Purpose criteria

Entirely new instruments, furniture, or building projects are normally classified as capital projects under federal tax rules. If it is a repair or a replacement of part of existing equipment or structures, it is included in the operational budget.

Certificate of Need

A document issued by a government regulatory body to authorize a capital project.

1. a narrative description, or justification of the need and intended use

2. quantitative techniques to determine the financial feasibility of the project

Two types of analysis are used in evaluating capital expenditures:

Narrative tools

Include a written justification of the project and a prioritization of the competing proposals.

Justification

In detailing the rationale for requesting an instrument or building program, the manager must explain why the project is needed, how it will benefit the laboratory, and why it should be considered over competing projects.

1. Necessary to maintain present service levels

2. Will provide significant savings over current methods

3. Will enhance or improve current programs

4. Will offer new procedures or services

Proposals can be justified by being grouped into one of four categories:

Prioritization

An additional step needed in the justification process is to prioritize the project, both in the time frame and in relation to other requests. Many capital budget forms have a scale to rank priority: others request a detailed narrative explanation of the acquisition and/or completion timetable.

Opportunity Costs

is the value of what is given up to pursue another project.

Quantitative Tools

The quantitative techniques available to evaluate investment opportunities vary from simple profit-and-loss projections to sophisticated models that take into account taxation, inflation rate, economic forecasts, and revenue and cost predictions.

1. payback period

2. average rate of return

3. net present value

Laboratory managers should be familiar with the techniques most frequently used and be able to apply them in support of their proposal. The most common methods used in health care facilities include:

Payback Period

It determines how long it will take to recover cash outlays for a project. This procedure's value as an investment index has received severe criticism because it does not take into account any other monetary factors. Taken by itself, this point is true. However, the payback period is almost always required and is useful in that it demonstrates how long the company's money is in jeopardy.

Average Rate of Return

is a straightforward calculation of the attractiveness of the average yield that will be earned over the life of an investment.

Net Present Value

The worth of future earnings at today’s rates.

• the impact of interest and inflation on earnings

• the anticipated revenue that will be received over a period of years

The calculation determines the current value of an investment taking into account the following two factors:

Internal Rate of Return

• Also referred to as the time-adjusted return method, incorporates both cash flow and cost-of-capital factors and compares them to the amount of investment required.

• This equation is closely related to the net present value in formulation and complication. It is a useful tool in evaluating capital options, and business calculators have been programmed to perform this task with only three inputs: projected cash flow, initial cost of the project, and the expected life of the venture (years).

Required Rate of Return

• Most for profit enterprises have established a bottom-line level of income, or required rate of return, which must be achieved before any project will be considered.

• If the venture cannot be shown to benefit the company economically in cost savings, efficiency enhancement, or cash flow, it is rejected outright.

• outright purchase

• leasing

• reagent rental plans.

With laboratory instruments, three options are available for consideration:

capital outlay

If an item is purchased outright, it is considered a?

operating lease

If the lease can be canceled at any time without further commitment by the firm, it is called an?

capital lease

A lease that cannot be canceled or includes an option to purchase is called a?

Depreciation

• A reduction in value of an asset with the passage of time, due in particular to wear and tear

• takes into account the facts that capital projects are used over an extended period and that the value of these assets diminishes with time and use.

Salvage value

• is defined as the value of an item at the time of resale, trade-in, or disposal.

• Is the estimated book value of a asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important component in the calculation of a depreciation schedule.

Straight line depreciation

• is the method based on the time element

• As a product grows older, its value decreases and maintenance costs increase.

• This method can be used for all capital items, but it is usually used to establish depreciation rates for buildings and other structures with an extended life expectancy (i.e., greater than 10 years).

unit of output

It is based on the assumption an asset will produce a fixed number of units over its lifetime.

Accelerated Depreciation

• The reduction of value of the asset due to wear and tear is termed as depreciation.

• Used to take advantage of tax loopholes and manipulate the reporting of financial performance, as allowed by taxing and lending authorities.

• These may benefit the company over the short term by increasing costs to offset large profits or reduce the amount of the taxes owed.

Faster Reduction in value in the earlier years

The wear and tear reduce value of some assets at a faster rate in the early years.

Benefit in tax

The additional expense reduces the income and therefore the tax in the early years.

The double declining balance (DDB) and sums-of-year digits (SYD)

• are the most common acceleration techniques.

• Both methods can be computed using special tables or programmable calculators.

true

TRUE OR FALSE: The capital budget process culminates in the preparation and submission of a capital budget proposal.