# Discussion 09.2: Budget Variance HA4200D – Healthcare Financial Management

Discussion 09.2: Budget Variance

Read the case study “Hospitals and Healt

Discussion 09.2: Budget Variance HA4200D – Healthcare Financial Management

Discussion 09.2: Budget Variance

Read the case study “Hospitals and Health Systems Face Unprecedented Financial Pressures due to COVID-19”.

Create an initial post with a minimum of 150 words discussing the impact of a global pandemic on a nation’s healthcare financial system. Make sure to include the items below:

.Describe the expected revenue declines in healthcare finances due to a pandemic from the case study provided.

2.Describe the expected expense increased in healthcare finances due to a pandemic from the case study provided.

Health Care Finance: Basic Tools for Nonfinancial Managers–Vitalsource Bookself-username-crtshhill49@yahoo.com-Password-#magicMAN61 Chapter 18:

Variance Analysis And Sensitivity Analysis

Budgets and Variance Analysis

A variance is the difference between standard and actual prices and quantities.

Flexible budgeting variance analysis provides a method to get more information about the composition of departmental expenses.

Variance Analysis

This method subdivides variance into three types:

Volume

Use (or quantity)

Spending (or price)

Volume Variance Represents

Portion of the overall variance caused by a difference between the expected workload and the actual workload.

Calculated as the difference between the total budgeted cost,* expected workload and the amount that would have been budgeted had the actual workload been known in advance.

* Defined as standard hours for actual production. Study text and illustration in the chapter.

Variance Analysis (1 of 3)

Use (or quantity) variance represents

Portion of the overall variance caused by a difference between the budgeted and actual quantity of input needed per unit of output.

Calculated as the difference between the actual quantity of inputs used per unit of output multiplied by the actual output level and the budgeted unit price.

Variance Analysis (2 of 3)

Spending (or price) variance represents

Portion of the overall variance caused by a difference between the actual and expected price of an input.

Calculated as the difference between the actual and budgeted unit price (or hourly rate) multiplied by the actual quantity of labor consumed (or supplies, etc.) per unit of output and by the actual output level.

Variance Analysis (3 of 3)

Can be performed as two-variance or three-variance analysis

Two-variance compares volume variance to budgeted costs.*

Three-variance compares volume variance, use variance, and spending variance.

* Defined as standard hours for actual production.

Variance Analysis: Example (1 of 2)

Our variance analysis example and practice exercise use the flexible budget approach.

A flexible budget is one that is created using budgeted revenue and/or budgeted cost amounts.

A flexible budget is adjusted, or flexed, to the actual level of output achieved (or perhaps expected to be achieved) during the budget period.

Variance Analysis: Example (2 of 2)

A flexible budget thus looks toward a range of activity or volume (versus only one level in the static budget).

Examples of how the variance analysis works are shown in:

Figure 18-1 (the elements)

Figure 18-2 (the composition)

Figures 18-3 and 18-4 (the calculation)

Study these examples before undertaking the Practice Exercise.

Variance Analysis: Solution to

Practice Exercise 18-1 (1 of 3)

The Price Variance is $100,000 (favorable).

The Quantity Variance is $120,000 (unfavorable).

The Net Variance is $20,000 (unfavorable).

Variance Analysis: Solution to

Practice Exercise 18-1 (2 of 3)

Variance Analysis: Solution to

Practice Exercise 18-1 (3 of 3)

Variance Analysis: Solution to

Assignment 18-1

Worksheet 1

Applied Overhead Costs

Less: Budgeted Overhead Costs

Volume Variance (favorable)

Worksheet 2

Applied Overhead Costs

Less: Budgeted Overhead Costs at 24,000 hours

Budget Variance (unfavorable)

Worksheet 3

Volume Variance = favorable

Less: Budgeted Variance = unfavorable

Net Variance (favorable)

Routine Services Nursing

$56,400

(48,000)

$8,400 Laboratory

$82,920

(71,000)

$11,920

$49,000

(48,000)

$1,000

$71,200

(71,000)

$200

$8,400

(1,000)

$7,400

$11,920

(200)

$11,720

Variance Analysis and Budgets

Variance analysis can be applied to both flexible budgets and to static budgets.

(Definitions of both follow.)

Flexible Budgets

Are based on a level of operation that will change. In other words, the level of operations, or volume, is adjusted to show change during the budget period.

(The Hospital Rehab Services Example 1 and the Infusion Center Example 3 are both examples of flexible budget variance analysis.)

Budget Types

Are essentially based on a single level of operations. That level of operations, or volume, is never adjusted during the budget period.

(The Open Imaging Center Example 2 is an example of static budget variance analysis.)

Sensitivity Analysis (1 of 3)

Sensitivity analysis is a “what if” proposition.

It answers questions about what may happen if major assumptions change or if certain predicted events do not occur.

Sensitivity Analysis (2 of 3)

Forecasts should almost always be subjected to sensitivity analysis.

Because a forecast views the future, and the future can never be absolutely predicted, forecasts will always contain a degree of uncertainty.

So the “what-if” analyses become important to the manager’s decision-making.

Sensitivity Analysis (3 of 3)

A common example of sensitivity analysis is computing three levels of forecast revenue:

Basic (planned and most likely)

High (best case)

Low (worst case)

(See the example in Figure 18-5.)

Sensitivity Analysis: Solution to Assignment 18-2

Sensitivity Analysis Tools

Manager’s tools involving sensitivity analysis include:

Contribution margin and the contribution income statement

Target operating income (using the contribution margin method)

Finding the break-even point (using the contribution margin method)

Contribution Margin

You will recall that the contribution margin is the difference between revenue and variable costs.

The remaining difference is then available for fixed costs and operating income.

Contribution Margin Income Statement

The format appears as follows :

Revenue $5,000

Variable costs 3,000

Contribution margin $2,000

Fixed costs 1,200

Operating income $ 800

Target Operating Income Using the Contribution Margin Method

A target operating income computation allows the manager to determine how many units must be sold to yield a particular operating income.

(Related discussion and illustration of the computation appears in the chapter.)

Break-Even Point Using the Contribution Margin Method

The break-even point is the point at which operating revenues and costs equal each other and operating income is zero.

(Related discussion and illustration of a break-even point computation using the contribution margin method appears in the chapter.)

Target Operating Income: Solution to Practice Exercise 18-2

The required revenue to achieve a target operating income of $20,000 amounts to revenue of $75,000.

Target Operating Income: Solution to Assignment Exercise 18-3

The required revenue to achieve a target operating income of $100,000 amounts to revenue of $640,000.

50,000

100,000

150,000

200,000

250,000

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