Chapter 14: Budget Concepts for Patient Care

MULTIPLE CHOICE

1. A nurse manager is preparing a budget that outlines anticipated revenue and expenses over the next
fiscal year. This is an example of which of the following?
a. Operational budget c. Construction budget
b. Capital budget d. Accounting
ANS: A
An operational budget is a financial tool that outlines anticipated revenue and expenses over a
specified period. A capital budget accounts for the purchase of major new or replacement equipment. A
construction budget is developed when renovations or new structures are planned. A process called
accounting assists with budget documentation; it is an activity that managers engage in to record and
report financial transactions and data.

PTS: 1 DIF: Application REF: OPERATIONAL BUDGET

2. An expense that is associated with patient care is:

a. fixed. c. direct.
b. indirect. d. variable.
ANS: C
Direct expenses are those expenses that can be directly associated with patient care. Medical and
surgical supplies and drugs would be considered direct expenses. Fixed costs are expenses that are
constant and are not related to productivity or volume. Indirect expenses are expenses not directly
related to patient care. Variable costs fluctuate depending on the volume, or census, and types of care
required.

PTS: 1 DIF: Comprehension

REF: DIRECT AND INDIRECT EXPENSES

3. A department manager’s budget concerned with the income and expenses associated with day-to-day
activities of the unit is a(n):
a. operational budget. c. construction budget.
b. capital budget. d. balanced budget.
ANS: A
An operational budget accounts for the income and expenses associated with day-to-day activity
within a department or organization. A capital budget accounts for the purchase of major new or
replacement equipment. A construction budget is developed when renovations or new structures are
planned. A balanced budget is one where the expenses are equal to or less than the revenues.

PTS: 1 DIF: Application REF: OPERATIONAL BUDGET

4. The radiology department has requested that the hospital purchase a new mammogram machine. This
equipment would be included in which of the following budgets?
a. Operational budget c. Construction budget
b. Capital budget d. Balanced budget
ANS: B
 A capital budget accounts for the purchase of major new or replacement equipment. An operational
budget accounts for the income and expenses associated with day-to-day activity within a department
or organization. A construction budget is developed when renovations or new structures are planned.
A balanced budget is one where the expenses are equal to or less than the revenues.

PTS: 1 DIF: Application REF: CAPITAL BUDGET

5. When planning the budget for the unit, the nurse manager recognizes that equipment depreciation,
utilities, fringe benefits, and salaries are considered:
a. fixed costs. c. direct expenses.
b. variable costs. d. indirect expenses.
ANS: A
Fixed costs are those expenses that are constant and not related to productivity or volume. Examples of
these costs are equipment depreciation, utilities, fringe benefits, and salaries. Variable costs fluctuate
depending on the volume, or census, and types of care required. Direct expenses are those expenses
that can be directly associated with patient care. Indirect expenses are expenses not directly related to
patient care.

PTS: 1 DIF: Application REF: FIXED AND VARIABLE COSTS

6. Medical and surgical supplies, drugs, laundry, and food are considered:
a. fixed costs. c. direct expenses.
b. variable costs. d. indirect expenses.
ANS: B
Variable costs fluctuate depending on the volume, or census, and types of care required. Medical and
surgical supplies, drugs, laundry, and food costs often increase with the volume. Fixed costs are those
expenses that are constant and not related to productivity or volume. Direct expenses are those
expenses that can be directly associated with patient care. Indirect expenses are expenses not directly
related to patient care.

PTS: 1 DIF: Comprehension

REF: FIXED AND VARIABLE COSTS

7. Gas, electricity, and phones are considered:

a. fixed costs. c. direct expenses.
b. variable costs. d. indirect expenses.
ANS: D
Indirect expenses are items such as utilities, gas, electricity, and phones that are not directly related to
patient care. Fixed costs are those expenses that are constant and not related to productivity or volume.
Variable costs fluctuate depending on the volume, or census, and types of care required. Direct
expenses are those expenses that can be directly associated with patient care.

PTS: 1 DIF: Comprehension

REF: FIXED AND VARIABLE COSTS

8. If an organization takes donations, this money is considered a:

a. profit. c. dashboard.
b. revenue. d. variance.
ANS: B
 Revenue is income generated through a variety of means—donations, billable patient services, and
investments. Profit is determined by the relationship of income to expenses. A dashboard is a
documentation tool providing a snapshot image of pertinent information and activity reflecting a point
in time. A variance is the difference between what was budgeted and the actual result.

PTS: 1 DIF: Application REF: REVENUE

9. In the budget preparation phase, obtaining information regarding other hospitals’ performance is
considered:
a. demographic information. c. strategic initiatives.
b. regulatory influences d. competitive analysis.
ANS: D
A competitive analysis probes how the competition is performing by examining other hospitals’
practices. Demographic information identifies unique characteristics of the market that influence
patient behavior. Regulatory influences affect financial performance and are influenced by several
governing bodies. Strategic initiatives include strategic plans that guide the direction of the
organization over several years.

PTS: 1 DIF: Comprehension

REF: COMPETITIVE ANALYSIS

10. Obtaining information on Medicare services is considered:

a. demographic information. c. strategic information.
b. regulatory information. d. competitive information.
ANS: B
Medicare is a federal regulatory body in the area of health care reimbursement. Other regulatory
bodies include the Food and Drug Administration and the Joint Commission.

PTS: 1 DIF: Comprehension

REF: REGULATORY INFLUENCES

11. A nurse researcher is collecting data on the average income of residents in her community. The
purpose of the study is to determine if there is a correlation between income, educational level, and
health beliefs. The data related to average income is considered:
a. competitive analysis. c. strategic initiatives.
b. demographic information. d. regulatory influences.
ANS: B
Demographic information such as average income, age, race, sex, and background provides insight
into consumer individuality. Competitive analysis probes how the competition is performing by
examining other hospitals’ practices. Strategic initiatives include strategic plans that guide the
direction of the organization over several years. Regulatory influences affect financial performance
and are influenced by several governing bodies.

PTS: 1 DIF: Comprehension

REF: DEMOGRAPHIC INFORMATION AND MARKETING

12. A new nurse is receiving training on a payment classification system used for reimbursement of health
care costs by Medicare. The nurse is most likely learning about which of the following?
a. Managed care contracts c. Diagnosis-related groups
b. Penetration rate revenue d. Length-of-stay records
ANS: C
 The nurse is most likely learning about diagnosis-related groups (DRGs), which is the system used by
Medicare to group inpatients into categories for reimbursement. This form of classification system is
used to group inpatients into categories based upon the number of inpatient days, age, complications,
and so on. Reimbursement covers room and board, tests, and therapy during a predetermined length of
stay.

PTS: 1 DIF: Comprehension REF: REVENUE

13. During the budget process, the nurse manager wants to drill down into expenses and detail the cost of
every supply item and quantity of times it is typically used. This is called:
a. accountable budgeting. c. operating budget.
b. zero-based budgeting. d. capital budget.
ANS: B
Zero-based budgeting is a process used to drill down into costs associated by detailing every supply
item and quantity of times it is typically used. Accounting is an activity that managers engage in to
record and report financial transactions and data. An operating budget accounts for the income and
expenses associated with the day-to-day activities within a department or organization. A capital
budget accounts for the purchase of major new or replacement equipment.

PTS: 1 DIF: Analysis REF: SUPPLIES

14. When examining the budget, the nurse manager knows that approximately 50 percent to 60 percent of
the operational expenses are for which of the following?
a. Supplies c. Salaries and benefits
b. Equipment d. Pharmaceuticals
ANS: C
Labor is a significant cost. Salaries and benefits account for 50 percent to 60 percent of operational
costs.

PTS: 1 DIF: Comprehension REF: LABOR

15. When developing a budget that meets the needs of the department, the nurse manager understands that
sick time, vacation time, and holiday time are considered which of the following?
a. Productive time c. Direct expenses
b. Unproductive time d. Variable costs
ANS: B
Unproductive time is when staff is not working; it usually includes sick, vacation, personal, holiday,
and education time. Productive time is when staff is working directly with patient care. Direct
expenses are those expenses that are directly associated with the patient. Variable costs fluctuate
depending on the volume, or census, and types of care required.

PTS: 1 DIF: Comprehension REF: UNPRODUCTIVE TIME

16. A nurse manager wishing to positively affect the budget could employ which of the following
strategies?
a. Increase patient charge items c. Maintain productivity
b. Maintain patient length of stay d. Evaluate staff downtime
ANS: D
Some strategies that staff can use to positively affect the budget are to evaluate staff downtime, enter
charges in a timely manner, reduce the patient length of stay, enhance productivity, analyze the cause
of delays, and explore new products.
 PTS: 1 DIF: Application REF: BUDGET APPROVAL AND MONITORING

17. When evaluating the organization, the nurse manager realizes that overall organizational performance
is dependent on which of the following?
a. Managers’ insight into financial outcomes
b. Staff’s insight into quality and financial outcomes
c. Organization’s strategic plan
d. Administration’s insight into financial outcomes
ANS: B
Overall, organizational performance is dependent on the insight and skill that the staff hold related to
patient care quality and financial outcomes. Managers must engage the staff to understand the budget
process and implement strategies that positively affect the budget, which is in alignment with the
organization’s strategic plan and is, in turn, guided by the administration.

PTS: 1 DIF: Comprehension REF: KEY CONCEPTS

18. A nurse manager is listing the number and type of staff needed for a procedure, otherwise known as
which of the following?
a. Staffing model c. Pre-procedure care
b. Direct patient preparation d. Post-procedure care
ANS: A
A staffing model outlines the number and type of staff required for a procedure. Time analysis for a
procedure includes pre-procedure care, direct patient preparation, intra-procedure care, and post-
procedure care.

PTS: 1 DIF: Comprehension REF: STAFFING

19. During an in-service on budgeting, the staff developer asks the participants, “Who is responsible for
ensuring that expenses are kept within the budget?” The participants would be correct if they gave
which of the following responses?
a. Chief financial officer c. Staff nurse using supplies
b. Unit manager of department d. Entire health care team
ANS: D
The entire health care team is responsible for ensuring that expenses are kept within the budgeted
amount. Nurses can have a major impact by following standards and reducing waste related to
supplies.

PTS: 1 DIF: Comprehension

REF: BUDGET APPROVAL AND MONITORING

20. A nurse manager, giving a presentation to subordinates, details an issue associated with registered
nurses known as “failure to rescue.” Research has shown that “failure to rescue” is linked to which of
the following?
a. Lower proportion of hours of care at the bedside
b. Weak cardiopulmonary resuscitation skills
c. Inappropriate budgeting by the manager
d. Inadequate equipment and resources
ANS: A
 Low proportion of nursing hours of care per day has been linked with “failure to rescue,” which is
defined as death from pneumonia, shock or cardiac arrest, upper GI bleeding, sepsis, deep venous
thrombosis, and urinary tract infections.

PTS: 1 DIF: Application REF: EVIDENCE FROM THE LITERATURE

21. When developing the budget, the nurse manager knows that a variance analysis that must be explained
is which of the following?
a. Actual = budget c. Actual > budget
b. Actual < budget d. Projected = budget
ANS: C
A variance is a difference between what was budgeted and the actual result. A manager must explain
variances where actual budget is greater than budgeted. Projections are not part of the operating
budget.

PTS: 1 DIF: Application REF: BUDGET OVERVIEW

22. One of the laboratories in your hospital budgeted $24,000 for procedure activity. However, when
reviewing the data, the head of the department realized that the actual cost was $26,250. What was the
variance?
a. 9.1 percent c. 10.4 percent
b. 9.4 percent d. 110 percent
ANS: C
The variance for the laboratory was 10.4 percent. To determine the variance, the head of the
laboratory would subtract the budgeted amount from the actual amount (26,500 – 24,000 = 2,500).
Next, 2,500 is divided by the budget amount of 24,000 = 10.4 percent.

PTS: 1 DIF: Analysis REF: BUDGET PREPARATION

23. A nursing student questions the instructor regarding the acronym DRGs. The most appropriate
response by the instructor is to inform the student that the acronym DRGs stands for which of the
following?
a. Debt ratio gain c. Disease recovery groups
b. Diagnosis-related groups d. Debt resource generator
ANS: B
The acronym DRGs stands for diagnosis-related groups. This form of payment classification system is
used to group inpatients into categories based upon the number of inpatient days, age, complications,
etc.

PTS: 1 DIF: Knowledge REF: REVENUE

24. As the nurse manager of the unit, you are responsible for monitoring the unit’s budget. You perform
these activities in order to do which of the following?
a. Demonstrate your expertise in budgeting
b. Keep expenses above the amount of revenues collected in previous years
c. Identify areas that may cause patient safety concerns
d. Ensure that revenue is generated consistent with projected productivity and standards
ANS: D
Budget monitoring is generally carried out on a monthly basis. The purpose of monitoring
is to ensure that revenue is generated consistent with projected productivity and standards.
 PTS: 1 DIF: Application REF: BUDGET APPROVAL AND MONITORING

25. The nurse manager plans to develop a picture of a moment in time that depicts whether the unit is
achieving its goals. This can be done by developing which of the following?
a. Storyboard c. Album with patients’ pictures
b. Dashboard d. Photographs of the unit
ANS: B
The nurse manager would most likely develop a dashboard. The purpose of the dashboard is to provide
a visual pulse of how a unit or department is achieving its goals. The dashboard is considered a picture
of a moment in time because the unit can change within days or weeks, which will impact the unit's
outcomes displayed on the dashboard.

PTS: 1 DIF: Analysis REF: BUDGET OVERVIEW

26. The nurses in the hospital received a letter stating that they would each be receiving a small raise. The
letter stated that the previous year’s income was higher than the expenses. This situation is known as
which of the following?
a. Profitability c. Accountability
b. Stability d. Responsibility
ANS: A
Profitability results when the income is higher than the expenses. The extra income would allow the
hospital to give raises to each of the staff members.

PTS: 1 DIF: Comprehension REF: BUDGET OVERVIEW

MULTIPLE RESPONSE

1. The nurse manager is preparing the budget. Which of the following would be considered direct costs?
Select all that apply.
a. Syringes and needles d. Medications
b. Dressing trays e. Housekeeping service
c. Phone bills f. Catheters
ANS: A, B, D, F
Direct expenses are those expenses directly associated with the patient such as medical and surgical
supplies and drugs. The manager would need to include syringes and needles, dressing trays,
medications, and catheters in the direct expense category. Indirect expenses are expenses for items
such as utilities, housekeeping, and maintenance.

PTS: 1 DIF: Comprehension

REF: DIRECT AND INDIRECT COST

2. When preparing a hospital’s budget, which of the following would be included in the fixed costs?
Select all that apply.
a. Utilities d. Laundry and food
b. Medical and surgical supplies e. Fringe benefits
c. Equipment depreciation f. Administrative salaries
ANS: A, C, E, F
 Fixed costs are those expenses that are constant and are not related to productivity or volume.
Examples of these costs are building and equipment depreciation, utilities, fringe benefits, and
administrative salaries. Variable costs fluctuate depending upon the volume, or census, and types of
care required.

PTS: 1 DIF: Comprehension

REF: FIXED AND VARIABLE COSTS

3. The hospital in your local community is considering expanding their pediatric services. Which of the
following pieces of demographic data would be important? Select all that apply.
a. Age of residents
b. Availability of pediatric services offered by other agencies in the area
c. Number of elderly residents
d. Incidence of prostate cancer
e. Number of women of childbearing age
f. Crime statistics for the area
ANS: A, B, E
The demographic information that would be most helpful would include age of residents, availability
of pediatric services offered by other agencies in the area, and number of women of childbearing age.
Information regarding the number of elderly residents, incidence of prostate cancer, and crime
statistics would not necessarily provide useful information.

PTS: 1 DIF: Analysis

REF: DEMOGRAPHIC INFORMATION AND MARKETING