Faulty Analysis That Assumes All Budget Items Are Variable

Faulty Analysis That Assumes All Budget Items Are Variable




Understanding the difference between fixed and variable costs can be critical. Kennard T. Wing, ofOMG Center for Collaborative Learning, reports that a large health care system made the mistake of classifying all of its costs as variable. As a consequence, when volume dropped, managers felt that costs should be cut proportionately and more than 1,000 people were laid off—even though “the workload of most of them had no direct relation to patient volume. The result was that morale of the survivors plummeted and within a year the system was scrambling to replace not only those it had let go, but many others who had quit. The point is, the accounting systems we design and implement really do affect management decisions in significant ways. A system built on a bad model of the business will either not be used or, if used, will lead to bad decisions.”

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