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The Essence of Capital Budgeting

Introduction

A capital budget focuses on long-term organizational investment strategy, although it can be generated yearly. The primary functions of capital budgeting are expansion and replacement, following a successful analysis of market conditions and opportunities (O’Connell, 2019). Development can occur through the entry to a new geographical area or the addition of new products and services to a company’s offerings. Both of these developmental decisions demand additional equipment. Similarly, operational facilities can deteriorate, alongside the machinery that needs updates or replacement. The financial plan tailored to meet such requirements is a future investment, and it is a capital budget prepared for this project. It majorly focuses on increasing the efficiency of nurses’ working unit by renovating caregivers’ lounge.

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Costs vary depending on the number of shares that investors hold, and the hospital capacity at different periods. This project’s initial step is to justify the capital acquisition, which begins from the analysis of fixed and variable costs. Various factors dictate whether to renovate the nursing lounge.

First, managers should consider its urgency and flexibility, as well as the need’s duration (Perrier et al., 2017). This project’s case shows that the need to renovate the nurses’ lounge is urgent because managers have noted significant complaints of poor morale, low nurse performance and a poor working environment. Moreover, the nursing unit manager has noticed considerable turnover for the past three years, implying the need to renovate the lounge has lasted long enough. A positive working environment improves employee productivity and satisfaction, reducing turnover rates.

Capital Budget Preparation

Lounge renovations will promote a positive work culture because employees will feel appreciated and valued. As a result, the nurses’ attitudes towards patient care will improve. Moreover, recreation will foster nurses’ satisfaction to sustain organizational goals and strategies, as Chen (2020) states, because they will have ample relaxing space and equipment for stress relieve. Following the operation budget prepared earlier, San Jose’s hospital capital budget for renovation is scheduled for approximately one year after the maintenance starts. Initial planning and preparation involved resource assessment, budget development and the creation of acquisition timelines.

Later on, the current nurses’ lounge will be cleared to facilitate renovation. The whole schedule will run for no more than one and a half years, tabulated in figure 1. An analysis of the lounge requirements led to the assumption that caregivers require a recreational facility with the following items:

Capital Budget for Nursing Lounge Renovation
Item Quantity Price for each in USD
comfortable couches 10 6000
Television sets 4 8,200
computers 10 3000
Nurses’ Library 1 18,000
Coffee bar 1 3700
Attendants 7 3,500
Total 42,400
Major Renovation Budget
Item Price Range ($)
Engineering and architectural work 250,000-300,000
Interior design 230,000
Internet facility 2,500
Miscellaneous 70,000
Total 577,500 577,500
Overall Cost 619900

Assumptions

  • The company will incur approximately $620000 to renovate the nursing lounge.
  • Seventy per cent of the capital cost will be obtained from the clinic’s equity.
  • The remaining amount will be sourced from a financial institution with less than ten per cent interest rates.

Cost Calculation for Budget Management

Process costing and job order costing are examples of procedures used in accounting to calculate the cost. This project will specifically utilize job order costing, which refers to the assignment and accumulation of individual expenses. It is applicable when items vary, and each has a high cost. Moreover, job order costing is appropriate when it differs from one batch to another, and it shows the processes that will be successful by some value (Perrier et al., 2017). Since the system provides a framework for calculating unit costs, it is appropriate for determining the financial budget for San Jose nurses’ lounge renovation.

After determining expenditure allocation, the company will take overhead costs, such as interior design, which cannot be directly allocated to specific renovation phases, and divide them with all process costs. The determination of the unit’s overheads is followed by calculating the value of each process. This value is achieved by aggregating all process costs and relating the figures with the projected renovation costs. If the budgeted renovation costs are lower than the overhead costs, the former is added to ensure maximum nurses’ satisfaction.

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Unusual circumstances may occur during renovation, leading to a change of plans. Tus, variance analyses will be necessary to ensure budget compliance and minimal unplanned expenses. It refers to the quantitative analysis of the difference between planned and actual behaviour. Variance analysis maintains control over a business plan, and it will be useful for renovation budget at San Jose health centre because the managers have reviewed the operating costs and established a more apparent trend in expenditures (Cheng & Liu, 2019. Thus, the project’s outcome will only be the difference from projections, apart from interpreting why the variance was experienced. The unit manager will conduct variance analysis with representatives from the financial department to identify any deviations.

How Capital Acquisition Will Affect Organizational Financial Health

As mentioned earlier, nurses’ satisfaction is directly related to patients’ wellness, determined by the care quality provided. High patient dissatisfaction reduces reimbursement rates in health care organizations, as it does to other business firms (Cheng, 2020). Thus, satisfying caregivers will lead to exquisite financial returns, keeping the company on a competitive edge. San Jose Hospital will acquire huge capital to renovate nurses’ lounge, but the expenses will foster caregivers’ satisfaction. In the end, the organization will retain nurses and patients, maintaining its profitability.

Although the renovation will promote nurses’ productivity, the company’s current operating costs reveal that some aspects of patient care may be compromised in the course of capital acquisition. Akinleye et al. (2019) examined the relationship between patient care and hospital finances and found that a strained financial condition leads to unsafe and poor patient care. Although most managers present predictive validity of financial measures, uncertain circumstances, such as sudden increase in patient attendance and readmission due to recurring conditions, compromise capital budgets’ reliability.

Additionally, most economic models rely on visible indicators, such as bankruptcy, which can easily be obtained, although it does not represent overall considerations (Cheng & Liu, 2019). This project used more comprehensive measures of hospital performance, which captured the total amount of revenue. Therefore, the capital acquisition process will not present significant shortcomings to the organization.

Conclusion

Nursing lounge renovation will enable caregivers to enjoy ample recreational space to prevent burnout and reduce turnover in the long run. The capital budget discussed earlier will ensure a cost-effective renovation to create a friendly working environment because nurses will feel valued and appreciated. Nurses’ satisfaction will eventually motivate them to help San Jose Clinic to maintain its competitive edges and earn substantial revenue. A capital budget of close to $620000 will surface the renovation of nurses’ lounge in the hospital. The capital acquisition step will increase reimbursement rates in the clinic, following patient retention.

References

Akinleye, D. D., Mcnutt, L., Lazariu, V., & Mclaughlin, C. C. (2019). Correlation between hospital finances, quality, and safety of patient care. Plos One, 14(8). Web.

Chen, H. C., Cates, T., Taylor, M., & Cates, C. (2020). Improving the US hospital reimbursement: How patient satisfaction in HCAHPS reflects lower readmission. International Journal of Health Care Quality Assurance, 33(7/8), 334-344.

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Cheng, J., & Liu, Y. (2019). Research on hospital cost management based on responsibility cost budget. Proceedings of the second International Symposium on Social Science and Management Innovation (SSMI 2019). Web.

Perrier, N., Pellerin, R., & Trudeau, R. (2017). Claim management-impact cost calculation methods in project management. Engineering Management Reviews, 6(1), 27. Web.

O’Connell, B. (2019). What is capital budgeting? Definition and examples. Web.

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