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Variance analysis

Objectives

Define variance analysis


Review traditional variance analysis
Understand flexible budget variance analysis
Problem
Introduce acuity level

Variance analysis
Variance analysis investigates differences (variances)
between planned and actual results. It helps managers:
prepare budgets for the coming year,
control results in the current year, and
evaluate the performance of operating units (not to blame).

Variance analysis focuses on material differences to


help managers correct problems and capitalize on
opportunities.

Some Variance Terms


Variance analyses can be prepared for costs, revenues, and profits/
(losses).
Lower than expected costs or higher than expected revenues or
profits result in favorable variances (F)
Higher than expected costs or lower than expected revenues or
profits result in unfavorable variances (U)
Some organizations treat favorable variances as positive
numbers, and some treat them as negative numbers. The same
is true for unfavorable variances.

An example
The budgeted and actual costs and the resulting month and Y-TD variances for the Hospital for Ordinary Surgery illustrate an
unfavorable cost variance.
This Month
Actual
$2,200,000

Budget
$1,800,000

Variance
$400,000 U

This Year
Actual
$25,476,000

Budget
$25,150,000

Variance
$326,000 U

Causes of variance
For variance analysis to be an effective tool, managers must understand the causes of variances
Quality
Technology
Efficiency
Policy
Standards
Price
Volume
Staff availability
Acuity

Traditional Variance Analysis


Compares actual costs to budgeted costs
Organization total variance
Departmental variance
Departments
Actual

Budget

Variance

Radiology

800,000

600,000

200,000 U

Pharmacy

500,000

410,000

90,000 U

General Surgery

900,000

790,000

110,000 U

2,200,000

1,800,000

400,000 U

Total

Traditional Variance Analysis (cont)


Line item variance

Department of
Radiology
Salary
Supplies
Total

Actual

Budget

Variance

400,000

395,000

5,000 U

400,000

205,000

195,000 U

800,000

600,000

200,000 U

Problems
Fails to take into account the impact of volume changes
on costs (obviously items that are variable costs)
Does not provide direction for further investigation of
variances

Flexible Budget Variance Analysis


Flexible budget variance analysis adjusts the budget (the variable
cost items) for actual patient volume and
Allows managers to identify what portion of a total variance is due
to:
differences between the budgeted and actual volume of some output
(Volume Variance),
differences between the budgeted and actual price (or rate) of each
unit of input or output (Price or Rate Variance), and
differences between the budgeted and actual quantities of the
resources used per unit of output (Quantity or Efficiency Variance).

Examples of Volume, Quantity and Price Variance


VOLUME

Had expected 30,000 patients but had 35,000

QUANTITY

Had expected 1 hour of nursing time per


patient but had 1 hour and
Had expected 1 film sheet on average per XRAY and used 3

PRICE/RATE

Had expected 35 per nursing hour but paid


36
Had expected 1 per sheet but paid 1.50

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