Financial Management and Budgeting
Budget types
An operating budget covers recurring revenue and expenses over a period, usually a fiscal year; a capital budget covers major long-lived purchases such as analyzers or building projects. Incremental budgeting adjusts last year's numbers, while zero-based budgeting requires each activity to justify its full cost. A flexible budget restates costs at actual volume, which makes it the fair comparison whenever volume departs from plan - a frequent trap is comparing actuals to a static budget at a very different volume.
Cost behavior and variance
Fixed costs do not change with volume inside the relevant range; variable costs do. An expense variance is favorable when actual is below budgeted; a revenue variance is favorable when actual is above budgeted. Watch for sign errors and for answers that call a variance favorable simply because it is large.
Break-even and contribution
Contribution margin per unit = price − variable cost per unit. Break-even volume = fixed costs ÷ contribution margin per unit. Put only fixed costs in the numerator - adding variable cost is the classic mistake. Break-even revenue = fixed costs ÷ contribution margin ratio.
Worked example
A test is billed at $45, variable cost is $25, and annual fixed costs are $120,000. Contribution margin is $20, so break-even = 120,000 ÷ 20 = 6,000 tests. Every test beyond 6,000 adds $20 toward profit.
Evaluating investments
Payback period is simple but ignores the time value of money; net present value is preferred for capital decisions because it discounts future cash flows. ROI = (benefit − cost) ÷ cost. Payor mix, cost-to-charge ratio, and work RVUs are the operational levers behind revenue.