A. Calculate and interpret the profit variance.
Profit Variance = Actual Profit – Static Profit
= 0.3 – 0.6
In words Newark General hospital was $300,000 below standard, and made less profit than their expectations.
B. Calculate and interpret the Revenue variance.
Revenue Variance = Actual Revenues – Static Revenues = 4.5 – 4.7
In words Newark General Hospital was $200,000 below standard, and generated less revenues than their expectations.
C. Calculate and interpret the Cost variance.
Cost Variance = Static Costs – Actual Costs
= 4.1 – 4.2
= – 0.1
In words Newark General Hospital’s $100,000 cost variance indicates that realized cost was much greater than expected.
D. Calculate and interpret the volume and price variance on the revenue side.
Volume Variance = Flexible Revenues – Static Revenues = 4.8 – 4.7
Price Variance = Actual Revenues – Flexible Revenues = 4.5 – 4.8
These variances tell that higher than expected volume should have resulted in revenues being $100,000 greater than expected. However, this potential revenue increase was partially offset by fact that realized prices were less than expected. The end result of higher volume at lower prices is realized revenue that was $200,000 less than forcasted.
E. Calculate and interpret the Volume and management variances on the cost sides.
Volume Variance = Static Costs – Flexible Costs
= 4.1 – 4.1
In words Newark General Hospital had no affect of volume to the costs of the Hospital, so, there was no change in the volume, which leaded to higher cost.
Management Variance = Flexible Costs – Actual Costs
=4.1 – 4.2 = -0.1
In words, in the Hospital cost overrun happened by some factor which are either controllable or can be controlled by management.
F. How are the variances calculated above related?
Explaining variances in financial statements is vital to the success of a business. Variances are the difference between budgeted amounts and actual income or expenses. Managers use variance reports to make changes in
financial forecasts and monitor the performance of a business or organization. Variance explanations might prompt a manager to put stronger financial controls in place or to reallocate resources.
8.2: 2007 revenues for the Wendover Group Practice Association for four different budgets, in thousands of dollars: | |Flexible |Flexible | | |Static Budget |(Enrollment/Utilization) |(Enrollment) |Actual Results | | |Budget |Budget | | |$425 |$200 |$180 |$300 |
A. What does the budget data tell you about the nature of Wendover’s patients: Are they capitated of fee-for-service? As per the budget data given for Wandover’s patients are capitated that is why information is divided into two flexible budgets, i. One for flexed for both enrollment and utilization and, ii. One flexed only for enrollment.
B. Calculate and interpret the following variances.
i. Revenue Variance:
= Actual Revenue – Static Revenue
= 300 – 425
Which indicates negative variance, so that revenue was $125,000 less than expected. ii. Volume Variance:
= Flexible Revenues – Static Revenues
= 200 – 425
iii. Price Variance:
= Actual Revenues – Flexible Revenues
= 300 – 200
Here lower than expected volume should have resulted in revenue
being $225,000 lower than expected, however, this potential revenue decrease was partially offset by the fact that realized prices were more than expected. The end result of lower volume at higher prices is realized revenue that was $125,000 less than forecasted. iv. Enrollment Variance:
= Flexible (Enrollment revenues) – Static revenues = 180 – 424
v. Utilization Variance:
= Flexible Revenues (Enrollment/Utilization) – Flexible = 200 – 180
The volume variance can be broken down further. Enrollment changes (deficiencies) caused a $245,000 shortfall from budget. However, utilization by the enrolled population was slightly down, which produced $20,000 in unexpected profit. Together, the enrollment shortfall and utilization decrease resulted in a volume shortfall of $225,000. In essence, some of the enrollment deficiency was offset by improvement in utilization control.