Is the variance positive or negative? Which is desirable, a positive or negative variance? Why? What do you think are some of the possible causes for this variance? How would you adjust Arcadia Hospital’s 2006 budget in light of your variance analysis? Explain your a (Dollars in Millions)
Operating Revenues 2005 % of rev Budget Over/(Under)
Patient revenues 500 550
less: Allowance for doubtful accounts 13 14
equals Net patient revenues 488 536
Other Income:
Investments 75 60
Misc 5 0
Total Operating Revenue 568 100.00% 596
Operating expenses:
Wages 200 35.24% 180
Taxes & Benefits 75 13.22% 70
Temporary/Contract Labor 5 0.88% 0
Medical/surgical supplies 25 4.41% 30
Other misc supplies 5 0.88% 5
Dues/subscriptions 3 0.53% 3
Transcription expense 10 1.76% 15
Leases & rentals 50 8.81% 45
Malpractice Insurance 75 13.22% 70
Other Insurance 30 5.29% 32
Professional Fees 20 3.52% 20
Utilities 15 2.64% 10
Maintenance & Repairs 15 2.64% 10
Depreciation/Amortization 7 1.23% 7
Interest Expense 1 0.18% 1
Total Operating Expenses 536 94.45% 498
Net Income 32 5.55% 98
nswer.
Do you really think we have access or knowledge of your budget variance analysis?
To determine whether the variance is positive or negative, we need to calculate the difference between the budgeted and actual values. In this case, the budgeted net income is $98 million, while the actual net income is $32 million. Thus, the variance is negative.
In general, a positive variance is desirable because it indicates that the actual performance exceeded the budgeted expectations. A negative variance, on the other hand, implies that the actual performance fell short of the budgeted expectations. Therefore, a positive variance is considered more favorable.
There could be several possible causes for this negative variance. Some potential reasons could include higher expenses than anticipated, lower than expected patient revenues, unexpected changes in reimbursements or insurance payments, increased competition, changes in market conditions, or inefficiencies in operations.
To adjust Arcadia Hospital's 2006 budget in light of this negative variance analysis, several steps can be considered:
1. Analyze the specific areas where expenses exceeded the budgeted amounts. This could involve reviewing the wages, taxes, supplies, rentals, insurance costs, professional fees, and other expenses. Identify the major contributing factors and assess whether any expenses can be reduced or managed more effectively in the future.
2. Evaluate the reasons for lower patient revenues. This might involve analyzing the billing and collection processes, assessing the performance of different service lines, and understanding any changes in patient volume or payer mix. Adjustments can be made to improve revenue generation and reduce the gap between budgeted and actual revenues.
3. Review the investment income and miscellaneous income categories. Identify any missed opportunities or areas for improvement to boost these sources of revenue.
4. Assess the impact of the negative variance on future financial planning. Consider whether adjustments need to be made to the overall budget for subsequent periods to ensure more accurate projections and achieve desired financial outcomes.
Remember, when adjusting the budget, it is crucial to involve key stakeholders, such as department heads, finance personnel, and administrators, to ensure a collaborative approach and enhance the chances of success in meeting financial targets.