Chapter 8 Problems 8.1 and 8.2.

Chapter 8 Problems 8.1 and 8.2.

8.1

Consider the following 2011 data for Newark General Hospital (in millions of dollars):

Static Flexible Actual

Budget Budget Results

Revenues $4.7 $4.8 $4.5

Costs 4.1 4.1 4.2

Profits 0.6 0.7 0.3

Calculate and interpret the profit variance.

=Actual profit-Static profit

=$0.3-$0.6

=-$0.3

There is an unfavorable profit variance which means that the company earned less that it prepared for.

Calculate and interpret the revenue variance.

=Actual revenues-Static Revenues

=$4.5-$4.7

=-$0.2

There is an unfavorable revenue variance, because the company sold less than it planned for.

Calculate and interpret the cost variance.

=Static Cost-Actual Cost

=4.1-4.2

=-$0.1

There is an unfavorable cost variance, this means that the company spent more than it planned for.

Calculate and interpret the volume and price variances on the revenue side.

Volume variance=Flexible Revenue-Static Revenue

=$4.8-$4.7=$0.1

Favorable because the company sold more units than it planned for.

Price variance=Actual Revenues-Flexible Revenues

=$4.5-$4.8=-$0.3

The answer is unfavorable because the company sold it products at a lower price than plan which might have actually resulted to the increase in actual volume sold.

Calculate and interpret the volume and management variances on the cost side.

Volume variance=Static cost Actual Cost

=$4.1-$4.1=$0

Favorable which means that regardless of the fact that the company sold more units, the company produce the same number of units it plan for.

Management variance=Flexible Cost Actual Costs

=$4.1-$4.2=$0.1

This is unfavorable which means maybe as a result of the higher units sold, the company had to spend more in servicing these units resulting to cost inefficiency for the period.

How are the variances calculated above related?

The above variances are associated, as the increase in volume, should increase the revenue and cost proportionality. However, it has not increased in the same portion. Therefore, there are unfavorable variances.

8.2

Here are 2011 revenues for the Wendover Group Practice Association for four different budgets (in thousands of dollars):

Flexible Flexible

Static (Enrollment/Utilization) (Enrollment) Actual

Budget Budget Budget Results

$425 $200 $180 $300

What does the budget data tell you about the nature of Wendovers patients:Are they capitated or fee for service?(Hint:See the note to Exhibit 8.7.)

Flexible Flexible

Static Enrollment/Utilization)(Enrollment)Actual

Budget Budget Budget Results

$425 $200 $180 $300

Static budget $425, Flexible (enrollment/utilization) budget $200, flexible (enrollment) budget $180, Actual Results $300

Calculate and interpret the following variances:

Revenue variance

Volume variance

Price variance

Enrollment variance

Utilization variance