Question

This week I started learning about Planning and Budgeting in Healthcare Finance.

I understand the formulas: Revenue Variance = Actual Revenue - Budgeted Revenue

Expense Variance = Actual Expense - Budgeted Expense

My question is, when you are looking at a Simple Budget Variance Analysis of a business for the fiscal year, how do you decide what information you used to plug into the equations?

Answer 1

Revenue:

This variance is the aggregate of sales volume variance and selling price variance.

Sales volume variance = (Actual units of sale – Budgeted units of sale) × Budgeted price per unit

If actual is greater, then favorable; otherwise unfavorable.

Selling price variance = (Actual price – Budgeted price) × Actual units of sale

If actual is greater, then favorable; otherwise unfavorable.

These volume and price variances should be there in variance analysis; therefore, should be added to get the revenue variance – if both are favorable, then should be added and the answer would be favorable; if both are unfavorable, then should be added and the answer would be unfavorable; if one is favorable and the other is unfavorable, then should be subtracted from each other and the answer would be as bigger figure.

Expense:

The concept is just opposite here in terms of favorable and unfavorable situations.

This variance is the aggregate of expense volume variance and expense price variance. Suppose for simplicity we can consider material expense.

Expense volume variance = (Actual units of expense – Budgeted units of expense) × Budgeted price per unit

If actual is greater, then unfavorable; otherwise favorable.

Selling price variance = (Actual price of suppose material – Budgeted price of suppose material) × Actual units of material purchase

If actual is greater, then unfavorable; otherwise favorable.

These volume and price variances should be there in variance analysis; therefore, should be added to get the expense variance – if both are favorable, then should be added and the answer would be favorable; if both are unfavorable, then should be added and the answer would be unfavorable; if one is favorable and the other is unfavorable, then should be subtracted from each other and the answer would be as bigger figure.