Question

In addition to the static budget, the clinic also created a flexible and actual budget to reflect the realized volume & actual volume respectively (see table below). Fill in the blanks on the table below & answer the following questions using the numbers from the table:

a-Calculate & interpret the profit variance

b-Calculate and interpret the revenue variance

c-Calculate & interpret the cost variance

d-Calculate & interpret the volume & price variances on the revenue side

e-Calculate & interpret the volume & price variances on the cost side

	Static budget	Actual budget	Flexible budget
Assumptions:
FFS visits	50,000	60,000	60,000
Capitated visits	90,000	100,000	100,000
Total	140,000	160,000	160,000
Revenues:
FFS visits	1,500,000	1,680,000	1,400,000
Capitated visits	1,080,000	1,080,000	1,080,000
Total	2,580,000	2,760,000	2,480,000
Costs:
FFS	642,857.145	833,400	750,000
Capitated	1,157,142.85	1,389,000	1,080,000
Total	1,800,000	2,222,400	1,830,000
Contribution Margin	?	?	?
Fixed costs	500,000	500,000	500,000
Profit	?	?	?

Answer 1

Table below gives the value as required.

Contribution Margin	780,000	537,600	650,000
Fixed costs	500,000	500,000	500,000
Profit	280,000	37,600	150,000
Profit variance calculation
Mean/Average profit	155867
deviation from mean	124,133	-118,267	-5,867
square of the deviation'	15,409,084,444	13,987,004,444	34,417,778
Mean Deviation or VARIANCE	9,810,168,889
Revenue variance calculation
Mean/Average revenue	2606666.667
deviation from mean	-26,667	153,333	-126,667
square of the deviation	711,111,111	23,511,111,111	16,044,444,444
Mean Deviation or VARIANCE	13,422,222,222
Cost ariance calculation
Mean/Average revenue	1950800
deviation from mean	-150,800	271,600	-120,800
square of the deviation	22,740,640,000	73,766,560,000	14,592,640,000
Mean Deviation or VARIANCE	37,033,280,000	18,984
Volume variance calculation Revenue side
Mean/Average revenue	153,333
deviation from mean	-13,333	6,667	6,667
square of the deviation	177,777,778	44,444,444	44,444,444
Mean Deviation or VARIANCE	88,888,889
Price variance calculation Revenue side
Revenue per visit (Calculated)	18.4	17.3	15.5
Mean/Average revenue	17.1
deviation from mean	1.4	0.2	-1.6
square of the deviation	1.9	0.0	2.4
Mean Deviation or VARIANCE	1.4

To understand the meaning of variance, we divide each variance with the square of average value for each item. For profit, the figure is 40% whereas for all of the rest, it is less than 1%. This means that profit shows huge fluctuation despite reasonable deviation in other values and is very sensitive to fluctations in input figures.