Deck 9: Flexible Budgeting and Variance Analysis

Question 1

What is a flexible budget?

Answer 1

Flexible Budget refers to the budget that adjusts the changes in the volume.
While preparing flexible budgets it is necessary to keep in mind that fixed costs do not change with the change in volume and variable costs changes with the change in volume. Flexible budget helps in recognizing that which costs are fixed and which are variable. There are various advantage and disadvantage of flexible budget.
Advantages:
1. Helps in measuring the performance by comparing actual output with the planned output.
2. Helps in fulfilling the cost control objective as flexible budget shows that where the changes occur between actual and planned performance.
Disadvantages:
1. Preparation of budgets is a time consuming process as it requires continuous changes and adjustments according to the volume.
2. Preparation of flexible budget is complicated due to many variables. Because when there is a need to change a single variable then changes in the whole budget would be required accordingly.

Question 2

The major problem with traditional variance analysis is that it focuses on trying to assign blame for spending more than the budgeted amount. True or false? Explain.

Answer 2

Variance refers to the difference between actual expenses and the estimated or budgeted expenses. Such variances are investigated in order to identify the cause of variance and further actions are taken by the managers to control the causes of variances.
Traditional analysis compares the line by line budgeted and actual expenses for each department or cost center. It provides only difference between actual and budgeted costs for each line item. It is difficult to determine which factors were responsible for what portion of variance.
Most of the time, variance are occurred not because of only one factor, but rather of many interplaying factors, sometimes offsetting each other and sometimes combining to result in a large variance. Cost is the main concern for tradition variance analysis as it doesn't give the clarity over the spending which creates unnecessary overhead cost.
Thus, it can be concluded that given statement is

Question 3

Not all variances should be investigated. Managers should be selective in deciding when to investigate a variance. True or false? Explain.

Answer 3

Variance refers to the difference between actual expenses and the estimated or budgeted expenses. Such variances are investigated in order to identify the cause of variance and further actions are taken by the managers to control the causes of variances.
Managers generally put an effort towards the understanding of variances better and anticipate the causes which can be occurred in future. Manager compares the line by line of actual and budgeted expenses for each department or cost center of the heath care organization.
Difference between the actual and budgeted expenses will always occur. If entire variances are investigated by the managers then a great deal of time will be wasted. Thus manager should investigate only that variance which needs more attentions.
Thus, it can be concluded that given statement is

Question 4

You are given the following information for the X-ray procedures for a given month:
Calculate the following variances:
a) Total Variance
b) Volume Variance
c) Quantity Variance
d) Price Variance

Question 5

You are given the following information for the X-ray procedures for a given month:
Calculate the price or rate, quantity or use, volume, and total variances for this department. Indicate whether each variance is favorable or unfavorable.

Question 6

What are price, quantity, and volume variances?

Question 7

You are the director of food services at the Golden Age Retirement Center. Given the following information, conduct a complete variance analysis. You should calculate the following:
a) Total Variance
b) Volume Variance
c) Meal Acuity/Mix Variance
d) Quantity Variance
e) Price Mix Variance

Question 8

Eastside Laboratory has decided that variances that are within two standard errors of the budgeted or expected value need not be investigated because they are quite likely to occur simply as a matter of chance. However, if the variance is more than two standard errors, either plus or minus, there is a significant chance that a control problem exists. Investigation is required.
Assume that last year is considered to be a period during which particular effort was made to control ancillary usage. As a result, we are willing to accept last year's results as a reasonable standard of performance. Assume further that last year, eight patients had a particular type of expensive lab test (this unrealistically low number of patients is used to simplify your calculations), and the number of units of resources consumed for each of the eight tests was as follows:
Calculate the standard error based on this test group from last year. Suppose that in the first month of this year, the average number of resource units used for each test of this type was 70. Is the resulting deviation from the standard great enough to warrant investigation?

Question 9

What are the possible subdivisions of the quantity variance that might provide additional insight into the underlying cause of a variance?

Question 10

Revenue Variances. Assume that the following information is known about the Budget for Kovner SurgiCenter.
You also know the following actual results:
Calculate the price, mix, volume, and total variances. Do the price, mix, and volume variances add information to the total variance?

Question 11

Will the price, quantity, and volume variances total to an amount greater than, the same as, or less than the variance using traditional analysis?

Question 12

Dr. Edwards is a surgeon who operates on patients in two different DRGs, DRG A and DRG B. Dr. Edwards has been press-; ing the hospital for more perks. He claims the hospital cannot afford to lose him now that he has become so cost-efficient. As evidence of his improved efficiency, he points out that in March, he operated on 13 patients. The total cost of treating the patients was $97,000. In April, he operated on 13 patients. The total cost of treating the patients was $92,700. According to Dr. Edwards, he has generated a total cost savings of $4,300. Although Dr. Edwards admits that his patient mix did change somewhat from March to April, he is sure the case-mix change was not what accounted for the bulk of the cost decrease for the patients he treated.
Your investigation determines that in March, he treated 5 DRG A patients with an average cost of $4,200 and 8 DRG B patients with an average cost of $9,500. In April he treated 6 DRG A patients and 7 DRG B patients. Costs in April for Dr. Edwards' patients were $4,600 for DRG A and $9,300 for DRG B. Although the April cost for DRG A patients had risen, Dr. Edwards points out that costs for the higher volume, higher cost DRG B patients had fallen.
Use the physician cost variance approach to develop a case-mix variance and a cost variance so we can better understand the impact of the changes in Dr. Edwards' practice from March to April. What other information would be of interest in this particular case?

Question 13

If a variance is found to be noncontrollable, is there any need to do anything other than explain its cause?