Assignment
Please prepare the homework problems in the form of a Word and/or Excel file. Try to use one file to submit your answers if possible and include the questions with your answers. You must show your calculations.
A dermatology clinic expects to contract with an HMO for an estimated 80,000 enrollees. The HMO expects 1 in 4 of its enrolled members to use the dermatology services per month. At the end of the year, the dermatology clinic™s business manager looked at her monthly figures and saw that the number of enrolled members had increased by 5% over the budgeted amount, and that 1 in 3 of the total HMO members had used the dermatology services per month. Net monthly revenues of the dermatology clinic were budgeted at $260,000 but were actually $450,000. Monthly expenses for the clinic were budgeted at $200,000 but were actually $270,000. Prepare a monthly revenue, expense, and net income variance budget for the clinic. Are these variances favorable or unfavorable? Why?
To prepare a monthly revenue, expense, and net income variance budget for the clinic, we need to calculate the budgeted values and actual values, and then calculate the variances.
Let's start by calculating the budgeted values:
1. Budgeted Monthly Enrollees: The dermatology clinic expects to contract with an estimated 80,000 enrollees.
2. Budgeted Monthly Utilization: The HMO expects 1 in 4 of its enrollees to use the dermatology services per month. So, the budgeted monthly utilization would be (80,000 / 4) = 20,000.
3. Budgeted Monthly Revenue: The budgeted net monthly revenue is $260,000.
4. Budgeted Monthly Expenses: The budgeted monthly expenses for the clinic are $200,000.
Now, let's calculate the actual values:
1. Actual Monthly Enrollees: The business manager noticed that the number of enrolled members had increased by 5% over the budgeted amount. So, the actual monthly enrollees would be (80,000 + 5% of 80,000) = 84,000.
2. Actual Monthly Utilization: The manager also noticed that 1 in 3 of the total HMO members had used the dermatology services per month. So, the actual monthly utilization would be (84,000 / 3) = 28,000.
3. Actual Monthly Revenue: The actual net monthly revenue is $450,000.
4. Actual Monthly Expenses: The actual monthly expenses for the clinic are $270,000.
Now, let's calculate the variances:
1. Revenue Variance: Revenue Variance = Actual Monthly Revenue - Budgeted Monthly Revenue = $450,000 - $260,000 = $190,000
2. Expense Variance: Expense Variance = Actual Monthly Expenses - Budgeted Monthly Expenses = $270,000 - $200,000 = $70,000
3. Net Income Variance: Net Income Variance = Revenue Variance - Expense Variance = $190,000 - $70,000 = $120,000
Finally, let's determine if these variances are favorable or unfavorable for the clinic:
- Revenue Variance: Since the actual revenue ($450,000) is higher than the budgeted revenue ($260,000), the revenue variance of $190,000 is considered favorable for the clinic.
- Expense Variance: Since the actual expenses ($270,000) are higher than the budgeted expenses ($200,000), the expense variance of $70,000 is considered unfavorable for the clinic.
- Net Income Variance: Since the net income is calculated as the difference between revenue and expenses, with a positive variance of $120,000, it can be considered a favorable variance for the clinic.
So, the revenue variance is favorable, the expense variance is unfavorable, and the net income variance is favorable for the clinic.