Budgeting for Downsizing, Cost Accounting & Lean Production
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Dr. Stephanie White, the Chief Administrator of Uptown Clinic, a community mental health agency, is concerned about the dilemma of coping with reduced budgets next year and into the foreseeable future but increasing demand for services. To plan for reduced budgets, she must first identify where costs can be cut or reduced and still keep the agency functioning. Below are some data from the past year.
Program Area
Costs
Administration
Salaries:
Administrator
$60,000
Assistant
$35,000
Two Secretaries
$42,000
Supplies
$35,000
Advertising and promotion
$9,000
Professional meetings/dues
$14,000
Purchased Services:
Accounting and billing
$15,000
Custodial
$13,000
Security
$12,000
Consulting
$10,000
Community Mental Health Services
Salaries (two social workers)
$46,000
Transportation
$10,000
Outpatient mental health treatment
Salaries:
Psychiatrist
$86,000
Two Social Workers
$70,000
1. Provide a dollar range of costs to reduce budgets (worst and best case analysis).
2. She needs to cut $94,000 in cost. Prioritize those cuts that can be made without impacting the operation or quality care of the organization.
Address the following:
* Describe how managerial accounting is different from cost accounting.
* Describe the lean production philosophy.
* Compare and contrast accounting principles in lean production to those of typical production.
* Describe how you would advise Dr. White to prepare for reduced budgets.
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Solution Summary
This solution includes an Excel spreadsheet with three budgeting scenarios addressing the required reductions for the Uptown Clinic; as well as short descriptions of the difference between cost accounting and managerial accounting.
Solution Preview
Cost Cutting is always a difficult task if only because it usually means telling someone they no longer have a job. The tough reality of budgeting is that employee salaries and associated benefits form the bulk of the operating costs of most organizations. This case is no different.
Please see the attached spreadsheet in which three cost cutting scenarios are modeled, labeled simply SCENARIO 1, 2 and 3.
In Scenario 1, the budget is reduced by the minimum of $94K. This is accomplished by the elimination of 1 secretarial position, and 2 social worker positions; as well as minimal reduction in other operating areas, such as renegotiating custodial and security vendor contracts for a small ($1K) reduction and by cutting a significant portion of the advertising budget.
Scenario 2 achieves total cost reduction of $101K, but in this scenario, one of the social worker positions is retained in order to meet the requirement that operations/quality of care not be impacted by the cost reductions. Budgets for Advertising, Consulting and Office supplies are cut back even more drastically than they were in Scenario 1 in order to be able to retain the SW ...
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