Question

In anticipation of ICD-10 implementation, you plan to contract with a coding consultant to provide coding services for your outpatient endoscopy and heart-center procedures and have included this year in your annual budget. It is expected that this service will be needed for two months while staff become familiar with ICD-10 coding, but you reserve the right to shorten or extend the contract based on circumstances at the time. Payment will be at the rate of $3.50 per chart. The projected volume for the period is 365 charts per week. Two weeks after ICD-10 is implemented, you realize that the coding staff can take on the outpatient and heart center procedures earlier than originally anticipated. You give the consultant two weeks notice that you will be returning the work-load to in-house staff. At the conclusion of the consultants service you will receive this invoice. Week 1 377 charts coded Week 2 363 charts coded Week 3 358 charts coded Week 4 372 charts coded Total 1470 charts coded at $3.50 per chart= $5,145 Classify and explain the type of budget variance depicted in this scenario.

Answer 1

Solution:

Given that the following information about

In anticipation of ICD-10 implementation, you plan to contract with a coding consultant to provide coding services for your outpatient endoscopy and heart center procedures and have included this year in your annual budget. It is expected that this service will be needed for two months while staff become familiar with ICD-10 coding, but you reserve the right to shorten or extend the contract based on circumstances at the time.

The difference between wages and gross pay calculated for employee. The payroll variance is the difference between the labor cost employees charge on their timesheets and the gross pay that is actually paid.

A budget is generally a list of all planned expenses and revenues. The budget is helpful for an organization plan for saving and spending for the near future.

Variance analysis is the analysis of the difference between planned and the actual numbers. The sum of all variances gives a clear a picture of the over-all over performance and the under-performance for a particular reporting period.

Budget variance occurs when an actual amount is different from a planned or budgeted amount. Most of the budget analysts calculate the budget variance by subtracting the budget figure from the actual spending figure.

The primary objective of variance analysis is to control cost and cost reduction.

The budget variance can be classified as follows:

According to the basis elements of cost

*Material cost variance: Is the difference between the actual cost of materials used and the standard cost for the actual output.

*Labour variance:

a. Labor cost variance: Is the difference between the actual direct wages paid and the direct labour cost allowed for the actual output to be achieved?

b. Labor Rate (of pay) variance: Is the difference between the standard rate specified and the actual rate paid.

c. Total labour efficiency variance: Is the difference between the standard labor cost of standard time for actual output and standard cost of actual time paid for.

d. Labour efficiency variance: Is the portion of labor cost variance which arises due to the difference between the standard labour hours specified for the output achieved and the hours spent.

*Overhead variance: Is the difference between the standard costs of overhead allowed for actual output and the actual overhead cost incurred.

According to the basis of controllability

*Controllable variance: When the variance is controllable whenever an individual or a department or may be held responsible for that variance

*Uncontrollable variance: Is the variance for which a particular person or a particular person or a specific department or the section cannot be held responsible.

According to the basis of impact

*Favourable Variance: The actual costs are lower than the standard costs at per-determined level of activity.

*Unfavourable variance: When the actual costs are more than the standard cost at predetermined level of activity.

According to the basis of nature

*Basis variance: The variance which arise on account of monetary rates/factors.

*sub-variance: The variances arising due to non-monetary factors.

In the present scenario we can see the Labor Rate Variance,i.e Direct Labour Rate Variance:

It is the measure of difference between the actual cost of direct labour and the standard cost of direct labor utilized during a period.

Calculate the Direct Labour Rate Variance = Actual Cost - Standard Cost of the Actual hours

*Step 1

Actual hours = 1470 charts x 3.50 per chart = 5145 hours

*Step 2

Actual Cost = Actual hours x Actual rate

=5145 hours x 3.50 per chart

=$18008

*Step 3

Standard Cost = they have given as $5145.00

Step 4

Labor Rate Variance =Actual cost - Standard Cost of the Actual hours

=$18008 - $5145

=$12863