Managing with Budget Variances Ruth was the chief nursing of

Managing with Budget Variances

Ruth was the chief nursing officer of a midsized hospital in a southwestern community. The hospital had experienced a number of very difficult years and had gradually lost market share to some of the newest market entrants. In its latest strategic plan, achieving competitive efficiencies had become a key priority. To accomplish this aim, the hospital would need to cut 10 percent of its costs. Because she managed the largest portion of hospital personnel, she was asked to defend the recent actual results against the budget, specifically for salary and related costs. She received the following data:

Analyze the data using volume, price, and efficiency variance.

Questions

Did Ruth\'s hospital achieve its 10 percent reduction in salary costs?

What effects did volume, price, and efficiency have on the outcomes?

What would you present to justify the financial results?

	Budgeted	Actual
Adjusted Patient Days	210,000	178,000
Net Revenues	52,000,000	51,285,000
Salary Costs	22,000,000	19,435,000
Other	2,350,000	1,650,000
Total Costs	24,350,000	21,085,000
Contribution Margin	27,650,000	30,200,000

Solution

Budgeted Budgeted Per unit price Actual based on budgeted price Actual Actual per unit Price Adjusted Patient days 210000 178000 178000 Net Revenues 52000000                         247.62                                            4,40,76,190.48 51285000      288.12 Salary Costs 22000000                         104.76                                            1,86,47,619.05 19435000      109.19 Other 2350000                           11.19                                                19,91,904.76 1650000           9.27 Total Costs 24350000                                            2,06,39,523.81 21085000 Contribution Margin 27650000 131.6666667                                            2,34,36,666.67 30200000      169.66 As we can see from the above analysis, the budgeted salary costs adjusted patient days should be 104.76 but as per actual adjusted patient days and based on salary costs the per patient days salary costs is 109.19. Hence Ruth\'s hospital was not able to achieve the 10 percent reduction in salary costs infact the salary costs has increased Though the adjusted patient days actually achieved was less than the budgeted, the hospital provided the service for more cost that is 288.12 instead of 247.62 due to which the hospital was able to achieve the contribution margin The hospital achieved the contribution margin by providing the services at higher rate per patient days As per the budgeted per patient days the contribution margin should be 23436666.67 The increase in salary costs was compensated by increase in revenue per patient days The Hospital was able to reduce the other costs to 9.27 from 11.19 Contribution margin patient days Budgeted Actual Revenue 247.62 288.12 Salary costs -104.76 -109.19 Other costs -11.19 -9.27 Contribution Margin 131.67 169.66 % of contribution margin 53.17% 58.89%