6.1 Consider the following 2012 data for Newark General Hospital (in millions of dollars):

Simple Budget Flexible Budget Actual Budget

Revenues $4.7 $4.8 $4.5

Costs 4.1 4.1 4.2

Profit 0.6 0.7 0.3

a) Calculate and interpret the two profit variances.

b) Calculate and interpret the two revenue variances.

c) Calculate and interpret the two cost variances.

d) How are the variances related?

6.2 Following are the budgets of Brandon Surgery Center for the most recent historical quarter (in thousands of dollars)

Simple Flexible Actual

Number of surgeries 1,200 1,300 1,300

Patient revenue $2,400 $2,600 $2,535

Salary expense $1,200 $1,300 $ 1,365

Nonsalary expense $ 600 $ 650 $ 585

Profit $ 600 $ 650 $ 585

The center assumes that all revenues and costs are variable and hence tied directly to patient volume.

a) Explain how each amount in the flexible budget was calculated. (Hint: Examine the simple budget to determine the relationship of each budget line to volume)

b) Determine the variances for each line of the P&L statement, both in dollar terms and in percentage terms.

c) What do the results in Part b tell Brandon's managers about center's operations for the quarter?

6.3 Refer to Carroll Clinic's 2012 operating budget, contained in Exhibit 6.2. Instead of the actual results reported in Exhibit 6.3, assume the results reported below:

Carrol Clinic: New 2012 Results

I. Volume (Number of Visits)

Payer A 11,000

Payer B 12,000

Total 23,000

II. Reimbursement (per Visit)

Payer A $ 95

Payer B $ 95

III. Costs

Variable Costs:

Supplies $ 350,000

Fixed Costs:

Labor $1,000,000

Overhead 500,000

Total $1,500,000

IV. Forecasted P&L Statement

Revenues:

Payer A $1,045,000

Payer B 1,140,000

Total revenues $2,185,000

Variable costs $ 350,000

Fixed costs 1,500,000

Total $1,850,000

Profit $ 335,000

a) What are the profit, revenue, and cost variances based on the simple (Exhibit 6.2) budget?

b) Construct Carroll's flexible budget for 2012.

c) What are the profit, revenue, and cost variances based on the flexible budget?

d) Interpret your results. In particular, focus on the differences between the variance analysis here and the Carroll Clinic illustration presented in the chapter.

EXHIBIT 6.2: Carroll Clinic: 2012 Operating Budget

I.Volume (Number of Visits)

Payer A 9,000

Payer B 12,000

Total 21,000

II.Reimbursement (Per Visit)

Payer A $100

Payer B $90

III.Costs

Variable Costs:

Supplies $315,000

Fixed Costs:

Labor $1,035,000

Overhead 500,000

Total $1,535,000

IV.Forecasted P&L StatementRevenues:

Payer A $ 900,000

Payer B 1,080,000

Total revenues $1,980,000

Variable costs $315,000

Fixed costs 1,535,000

Total costs $1,850,000

Profit $ 130,000