Question Details
Consider the following 2007 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
Pro?ts 0.6 0.7 0.3
a. Calculate and interpret the pro?t variance.
b. Calculate and interpret the revenue variance.
c. Calculate and interpret the cost variance.
d. Calculate and interpret the volume and price variances on the revenue side.
e. Calculate and interpret the volume and management variances on the cost side.
f. How are the variances calculated above related?
Find the following values for a lump sun ssuming annual compounding
To calculate and interpret the profit variance, revenue variance, cost variance, volume variance, price variance, management variance, and understand their relationships, we need to use the given data.
a) Profit Variance
Profit Variance is the difference between the actual profit and the flexible budget profit. In this case, the profit variance is 0.3 - 0.7 = -0.4 million dollars.
Interpretation: The hospital has a negative profit variance of -0.4 million dollars, indicating that the actual profit earned is less than what was expected in the flexible budget.
b) Revenue Variance
Revenue Variance is the difference between the actual revenue and the flexible budget revenue. In this case, the revenue variance is 4.5 - 4.8 = -0.3 million dollars.
Interpretation: The hospital has a negative revenue variance of -0.3 million dollars, indicating that the actual revenue generated is less than what was expected in the flexible budget.
c) Cost Variance
Cost Variance is the difference between the actual costs and the flexible budget costs. In this case, the cost variance is 4.2 - 4.1 = 0.1 million dollars.
Interpretation: The hospital has a positive cost variance of 0.1 million dollars, indicating that the actual costs incurred are higher than what was expected in the flexible budget.
d) Volume and Price Variances on the Revenue Side
Volume variance on the revenue side is the difference between the flexible budget revenue and the revenue budget based on flexible budgeted prices and actual volumes. Price variance on the revenue side is the difference between the flexible budget revenue and the revenue budget based on actual prices and flexible budgeted volumes.
To calculate volume variance, we need to calculate the revenue budget based on flexible budgeted prices and actual volumes:
Volume Variance = (Revenue budget based on flexible budgeted prices and actual volumes) - Flexible budget revenue
To calculate price variance, we need to calculate the revenue budget based on actual prices and flexible budgeted volumes:
Price Variance = (Revenue budget based on actual prices and flexible budgeted volumes) - Flexible budget revenue
e) Volume and Management Variances on the Cost Side
Volume variance on the cost side is the difference between the flexible budget costs and the cost budget based on flexible budgeted quantities and actual prices. Management variance on the cost side is the difference between the flexible budget costs and the cost budget based on actual quantities and flexible budgeted prices.
To calculate volume variance, we need to calculate the cost budget based on flexible budgeted quantities and actual prices:
Volume Variance = Flexible budget costs - (Cost budget based on flexible budgeted quantities and actual prices)
To calculate management variance, we need to calculate the cost budget based on actual quantities and flexible budgeted prices:
Management Variance = Flexible budget costs - (Cost budget based on actual quantities and flexible budgeted prices)
f) Relationship between the Variances
The variances calculated above are related in the following ways:
- Profit Variance is influenced by both revenue and cost variances.
- Revenue Variance is influenced by volume and price variances on the revenue side.
- Cost Variance is influenced by volume and management variances on the cost side.
- Volume variance is influenced by both revenue and cost variances on their respective sides.
These relationships help give a comprehensive understanding of the factors contributing to the variances and provide insights into the financial performance of Newark General Hospital.