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

a. Calculate and interpret the profit 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?

8.2

Here are the 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

a. What does the budget data tell you about the nature of Wendover's patients: Are they capitated or fee-for-service? (Hint: See the note to

Exhibit 8.7.)

b. Calculate and interpret the following variances:

• Revenue variance

• Volume variance

• Price variance

• Enrollment variance

8.4

Refer to Carroll Clinic's 2011 operating budget contained in Exhibit 8.3, Instead of the actual results reported in Exhibit 8.4, assume the results reported below:

Carroll Clinic: New 2011 Results

/. Volume:

A. FFS 34,000 visits

B. Capitated lives 30,000 members

Number of member-months 360,000

Actual utilization per

member-month 0.12

Number of visits 43,200 visits

C. Total actual visits 77,200 visits

II. Revenues:

A.FFS $28 per visit

X 34,000 actual visits $ 952,000

B. Capitated lives $ 2.75 PMPM

X 360,000 actual member-months $ 990,000

C.Total actual revenues $1,942,000

III. Costs:

A. Variable Costs:

Labor $1,242,000 (46,000 hours at $27/hour)

Supplies 126,000 (90,000 units at $1.40/unit)

Total variable costs $ 17.72 ($1,368,000 / 77,200)

B. Fixed Costs

Overhead, plant,

and equipment $525,000

C. Total actual costs $1,893,000

IV. Profit & Loss Statement:

Revenues:

FFS $952,000

Capitated $990,000

Total $1,942,000

Costs:

Variable:

FFS $602,487

Capitated 765,513

Total $1,368,000

Contribution Margin $574,000

Fixed Costs 525,000

Actual profit $49,000

a. Construct Carroll’s flexible budget for 2011.

b. What are the profit variance, revenue variance, and cost variance?

c. Consider the revenue variance. What is the component volume variance? The price variance?

d. Break down the cost variance into volume and management components.

e. Break down the management variance into labor, supplies, and fixed cost variances.

f. Interpret your results. In particular, focus on the differences between the variance analysis here and the Carroll Clinic illustration presented in the chapter.

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