Questions: 1. What is the aggregate profit (total) variance for 2022 for the business as a whole? Interpret your results. 2. What is the profit (total) variance for each of the four product lines? Interpret your results.

3. Decompose the profit (total) variance for the aggregate organization and for each product line into revenue and cost variances. Interpret your results.

4. Decompose the revenue variances into enrollment and rate variances. Interpret your results.

5. Decompose the cost variances into volume and management variances. Interpret your results.

6. Focus on the volume variances. Break these down into enrollment and utilization variances, both in the aggregate and for the four product lines. Interpret your results.

10.1 are used to forecast revenues and costs, both in the aggregate and by product line. Overall, Cascades expected to earn a total profit of $419,379 on the four product lines in 2022. EXHIBIT 10.2 Cascades Mental Health Clinic: 2022 Operating Budget Expected Product Line and Agoregale Profils During the first quarter of 2022, Cascades's managers noted a higher utilization rate than budgeted. To add to their concern, the monthly enrollment figures supplied by the contracting managed care plans were less than those budgeted. Together, these trends indicated lower revenues and higher per-enrollee costs, and hence lower profits, than forecasted in exhibit 10.2. These concerns were borne out when the first-quarter profits came in under budget. To help stem the adverse trend, the managers instituted a utilization management system in which all inpatient stays were required to be approved by the medical director, a senior staff psychiatrist. In addition, Cascades made midyear changes to its commercial premiums that increased the average premiums for the year. Unfortunately, the action taken was too little, too late to save the year. Exhibit 10.3 provides operating results for 2022 , and exhibit 10.4 shows the realized aggregate and product line profit and loss (P\&L) statements. A quick review of exhibit 10.4 reveals that the signals conveyed by the firstquarter data were indeed correct; although 2022 ended with a profit, the profit was much less than the amount forecasted. EXHIBIT 10.3 Cascades Mental Health Clinic: 2022 Operating Results ACUli Labor Leta per Aamssion or session EXHIBIT 10.4 Cascades Mental Health Clinic: 2022 Actual P\&L Statements Product Line and Aggregate Profit Resuits Wote: These data were generated on a spreadsheet, and hence some rouncing dfferer cos onct. When the results were submitted to Cascades's CEO, Jennifer Jacobs, she grimaced and said, "I knew it was coming, but I did not expect the profit number to be so low." It was immediately apparent to Jennifer that Cascades could not afford similar results in 2023. She knew that something had to be done, but the best course of action was not clear. To help plan for next year, Jennifer asked Cascades's finance and accounting department head, Rob Maldonado, to per- CASE 10 CASCADES MENTAL HEALTH CLINIC VARIANCE ANALYSIS Cascades Mental Health Clinic is a notfor-profit multidisciplinary mental health provider that offers both inpatient and outpatient services on a full-risk (capitated) basis to members of managed care plans. Its clinical staff consists primarily of psychiatrists, psychologists, psychiatric nurses, social workers, and chemical dependency counselors. Currently, Cascades has major contracts with two large managed care organizations in its service area: Pacific Care Plan and Seattle Health Plan. Each of these organizations has both commercial and Medicare health maintenance organization (HMO) contracts with Cascades. Thus, in total, there are four separate product lines. Cascades is partially funded by state and local governments. The agreement with the funding agencies is that funds received are to be used to cover overhead and capital expenses. Furthermore, expenses for drugs and other medical and administrative supplies are billed separately to the HMOs at cost. Thus, overhead and supplies expenses are not part of this budget, which means that the analysis focuses on clinical labor expenses. If the assumption is made that other payment mechanisms cover overhead, capital expenses, and supplies at cost, then the profitability of Cascades is solely a function of its ability to create revenues that exceed labor costs. Thus, its operating budget focuses on enrollment, per member premiums, utilization, and labor costs. Exhibit 10.1 lists the assumptions used to prepare Cascades's 2022 operating budget. Note that the four product lines are expected to provide a total of 4,551,000 member-months of revenue during 2022. Also, note that each product line has a different per member per month (PMPM) payment (premium) amount. Exhibit 10.1 also shows expected admission (for inpatients), referral rate (for outpatients), and labor cost and utilization data for each product line. Because of the unique employment arrangements between Cascades and its clinical staff, in which the staff are paid on the basis of the number of patient service units provided, clinical labor costs are virtually all variable, and hence labor costs are not identified as fixed or variable. EXHIBIT 10.1 Cascades Mental Health Clinic: 2022 Operating Budget Assumptions PC Commercia PC Medicare SH Commercia SH Medicare S0.70 0.85 0.75 Expected Lobor Data per Admission or Session Exhibit 10.2 contains the forecasted 2022 budget. In essence, the data in exhibit form a variance analysis on the data to help identify the problems that led to the poor financial results for 2022. Unfortunately, Rob's area of expertise is dealing with lenders and other capital suppliers, so he passed the assignment on to you, a newly hired financial analyst. To start the analysis, you created a diagram (exhibit 10.5) to help understand variance analysis. (Note that this diagram is generic and has not been customized for this case.) Furthermore, you recognize that because the volume variance consists of differences in both enrollment and utilization, it is necessary to create two flexible budgets: one flexed (adjusted) for actual enrollment only, and the other flexed for both actual enrollment and actual utilization. In addition, to help with the calculations, you jotted down an equation list for calculating variances (exhibit 10.6). (Note that not all of the equations listed are necessarily applicable to this analysis.) EXHIBIT 10.5 Variance Analysis Summary Of course, both Jennifer and Rob are more concerned with what the numbers mean than what the numbers are. Therefore, your variance analysis should include a great deal of interpretation along with the numbers. Finally, because you want to use this assignment to help advance your career at Cascades, you plan to go one step further by offering recommendations for management action along with the numbers and their interpretation. EXHIBIT 10.6 Generic Equation List \begin{tabular}{|c|c|} \hline Total variance & = Actual profit - Static profit \\ \hline Revenue variance & = Actual revenue - Stat ic revenue \\ \hline Enrollment variance & = Flox ble icnrolmonti rovonue - Static rovonue \\ \hline Rate variance & - Acual revenue - Fexble ienrollmenti revenue \\ \hline Cost variance & = Static costs - Actua costs \\ \hline Volume variance & = Static costs - Flcxible icnrollmentiutil zat oni costs \\ \hline Enrollrmenl variance & = Stalic cosis - Flexible iemrollmentl cosls \\ \hline Uti ization variance & =FlexbleIenrollmentcostsFlexiblelenrollmentutiizationicosts \\ \hline Mankgmenl vrance & \\ \hline Fixed cost variance & = Actual fixed costs - Flexible fixed costs \\ \hline Staffing variance & =Actualstaffingcosts-Flexiblelenrollmenttilizationistattingcosts \\ \hline Rate variance & =StatichourlylaborrateActualhourlylaborrateixActualnumberofhoursperepisodexActualutiizationratoxActualonrollmont \\ \hline ETiciency variance & \\ \hline Supplies variance & =Flexibleienrolmentiulilabionsuppliescosts-Acclualsuppliesoosts \\ \hline Price variance & = Static price - Actual pricel Actual units \\ \hline Usago verance & = iF oxblc units - Actual unitsi Static prico \\ \hline \end{tabular} 10.1 are used to forecast revenues and costs, both in the aggregate and by product line. Overall, Cascades expected to earn a total profit of $419,379 on the four product lines in 2022. EXHIBIT 10.2 Cascades Mental Health Clinic: 2022 Operating Budget Expected Product Line and Agoregale Profils During the first quarter of 2022, Cascades's managers noted a higher utilization rate than budgeted. To add to their concern, the monthly enrollment figures supplied by the contracting managed care plans were less than those budgeted. Together, these trends indicated lower revenues and higher per-enrollee costs, and hence lower profits, than forecasted in exhibit 10.2. These concerns were borne out when the first-quarter profits came in under budget. To help stem the adverse trend, the managers instituted a utilization management system in which all inpatient stays were required to be approved by the medical director, a senior staff psychiatrist. In addition, Cascades made midyear changes to its commercial premiums that increased the average premiums for the year. Unfortunately, the action taken was too little, too late to save the year. Exhibit 10.3 provides operating results for 2022 , and exhibit 10.4 shows the realized aggregate and product line profit and loss (P\&L) statements. A quick review of exhibit 10.4 reveals that the signals conveyed by the firstquarter data were indeed correct; although 2022 ended with a profit, the profit was much less than the amount forecasted. EXHIBIT 10.3 Cascades Mental Health Clinic: 2022 Operating Results ACUli Labor Leta per Aamssion or session EXHIBIT 10.4 Cascades Mental Health Clinic: 2022 Actual P\&L Statements Product Line and Aggregate Profit Resuits Wote: These data were generated on a spreadsheet, and hence some rouncing dfferer cos onct. When the results were submitted to Cascades's CEO, Jennifer Jacobs, she grimaced and said, "I knew it was coming, but I did not expect the profit number to be so low." It was immediately apparent to Jennifer that Cascades could not afford similar results in 2023. She knew that something had to be done, but the best course of action was not clear. To help plan for next year, Jennifer asked Cascades's finance and accounting department head, Rob Maldonado, to per- CASE 10 CASCADES MENTAL HEALTH CLINIC VARIANCE ANALYSIS Cascades Mental Health Clinic is a notfor-profit multidisciplinary mental health provider that offers both inpatient and outpatient services on a full-risk (capitated) basis to members of managed care plans. Its clinical staff consists primarily of psychiatrists, psychologists, psychiatric nurses, social workers, and chemical dependency counselors. Currently, Cascades has major contracts with two large managed care organizations in its service area: Pacific Care Plan and Seattle Health Plan. Each of these organizations has both commercial and Medicare health maintenance organization (HMO) contracts with Cascades. Thus, in total, there are four separate product lines. Cascades is partially funded by state and local governments. The agreement with the funding agencies is that funds received are to be used to cover overhead and capital expenses. Furthermore, expenses for drugs and other medical and administrative supplies are billed separately to the HMOs at cost. Thus, overhead and supplies expenses are not part of this budget, which means that the analysis focuses on clinical labor expenses. If the assumption is made that other payment mechanisms cover overhead, capital expenses, and supplies at cost, then the profitability of Cascades is solely a function of its ability to create revenues that exceed labor costs. Thus, its operating budget focuses on enrollment, per member premiums, utilization, and labor costs. Exhibit 10.1 lists the assumptions used to prepare Cascades's 2022 operating budget. Note that the four product lines are expected to provide a total of 4,551,000 member-months of revenue during 2022. Also, note that each product line has a different per member per month (PMPM) payment (premium) amount. Exhibit 10.1 also shows expected admission (for inpatients), referral rate (for outpatients), and labor cost and utilization data for each product line. Because of the unique employment arrangements between Cascades and its clinical staff, in which the staff are paid on the basis of the number of patient service units provided, clinical labor costs are virtually all variable, and hence labor costs are not identified as fixed or variable. EXHIBIT 10.1 Cascades Mental Health Clinic: 2022 Operating Budget Assumptions PC Commercia PC Medicare SH Commercia SH Medicare S0.70 0.85 0.75 Expected Lobor Data per Admission or Session Exhibit 10.2 contains the forecasted 2022 budget. In essence, the data in exhibit form a variance analysis on the data to help identify the problems that led to the poor financial results for 2022. Unfortunately, Rob's area of expertise is dealing with lenders and other capital suppliers, so he passed the assignment on to you, a newly hired financial analyst. To start the analysis, you created a diagram (exhibit 10.5) to help understand variance analysis. (Note that this diagram is generic and has not been customized for this case.) Furthermore, you recognize that because the volume variance consists of differences in both enrollment and utilization, it is necessary to create two flexible budgets: one flexed (adjusted) for actual enrollment only, and the other flexed for both actual enrollment and actual utilization. In addition, to help with the calculations, you jotted down an equation list for calculating variances (exhibit 10.6). (Note that not all of the equations listed are necessarily applicable to this analysis.) EXHIBIT 10.5 Variance Analysis Summary Of course, both Jennifer and Rob are more concerned with what the numbers mean than what the numbers are. Therefore, your variance analysis should include a great deal of interpretation along with the numbers. Finally, because you want to use this assignment to help advance your career at Cascades, you plan to go one step further by offering recommendations for management action along with the numbers and their interpretation. EXHIBIT 10.6 Generic Equation List \begin{tabular}{|c|c|} \hline Total variance & = Actual profit - Static profit \\ \hline Revenue variance & = Actual revenue - Stat ic revenue \\ \hline Enrollment variance & = Flox ble icnrolmonti rovonue - Static rovonue \\ \hline Rate variance & - Acual revenue - Fexble ienrollmenti revenue \\ \hline Cost variance & = Static costs - Actua costs \\ \hline Volume variance & = Static costs - Flcxible icnrollmentiutil zat oni costs \\ \hline Enrollrmenl variance & = Stalic cosis - Flexible iemrollmentl cosls \\ \hline Uti ization variance & =FlexbleIenrollmentcostsFlexiblelenrollmentutiizationicosts \\ \hline Mankgmenl vrance & \\ \hline Fixed cost variance & = Actual fixed costs - Flexible fixed costs \\ \hline Staffing variance & =Actualstaffingcosts-Flexiblelenrollmenttilizationistattingcosts \\ \hline Rate variance & =StatichourlylaborrateActualhourlylaborrateixActualnumberofhoursperepisodexActualutiizationratoxActualonrollmont \\ \hline ETiciency variance & \\ \hline Supplies variance & =Flexibleienrolmentiulilabionsuppliescosts-Acclualsuppliesoosts \\ \hline Price variance & = Static price - Actual pricel Actual units \\ \hline Usago verance & = iF oxblc units - Actual unitsi Static prico \\ \hline \end{tabular}