Question

1. Explain the three types of flexible budget variance and why it is important for every manager to understand these variables.

2. In one paragraph, present a practical application of Price Variance as a Manager. Use all appropriate formulae as necessary.

3. As the Manager of Walker Jones Memorial Hospital, you projected financial outcomes for 5 medical units in the hospital known for adding up to $ 30,000,000 all together of revenue to the hospital. The total cost of operating these units is $ 120,000 and a constant variable cost of $ 20,000. Consider that, at some point, each unit offered its regular patients lower medical costs of $ 30,000 off their bills. Calculate the Break-Even Number of Units.

4. From you answer above, prove that the operating income is 0 at break even.

5. As a manager, explain the implication of this outcome for the fiscal year.

Answer 1

1. Explain the three types of flexible budget variance and why it is important for every manager to understand these variables.

A static budget is a budget that does not change as volume changes. A flexible budget is a budget that changes when the level of activity changes.

A flexible budget variance = Actual amount - The amount allowed by the flexible budget. (Due to change in activity Ex- Volume Increase Decrease)

The three types of flexible budget variance are

• Basic flexible budget- The flexible budget alters those expenses that vary directly with revenues.
• Intermediate flexible budget - The flexible budget alters other expenditures apart from revenue
• Advanced flexible budget- There are ranges in this scenario. Expenditures may only vary within certain ranges of revenue or other activities. Outside of those ranges, a different proportion of expenditures may apply.

It is important for every manager to understand these variables because

• A flexible budget gives a company a tool for comparing actual to budgeted performance at various levels of activity.
• It is helpful when there is a cost dependency on level of business activity
• As the budget is varied based on the activity level, tracking of budget at a manager level gets easier.

2. In one paragraph, present a practical application of Price Variance as a Manager. Use all appropriate formulae as necessary.

There is a price variance occurs when there is a change in the number of units required to be purchased.

Price variance = (Actual cost incurred - standard cost) x Actual quantity of units purchased
Example: A company ABC, at the beginning of Q2 forecasts it needs 5000 units of an item at a price of $2. Since it is purchasing 5000 units, it receives a discount of 10%, bringing the per unit cost down to $1.8. However, turns out it only needs 3000 units of that item. It does not receive the 10% discount it initially planned, which brings the per unit cost to $2 and the price variance to 0.2$.

3. As the Manager of Walker Jones Memorial Hospital, you projected financial outcomes for 5 medical units in the hospital known for adding up to $ 30,000,000 altogether of revenue to the hospital. The total cost of operating these units is $ 120,000 and a constant variable cost of $ 20,000. Consider that, at some point, each unit offered its regular patients lower medical costs of $ 30,000 off their bills. Calculate the Break-Even Number of Units.

Operating cost= Fixed cost+ Variable cost

Fixed cost per unit = (120000 -20,000) =100000

Revenue per unit= $ 30,000,000/5 =$6,000,000

Variable cost per unit = $ 20000

Lowered cost= $ 30000

Breakeven point in units = Total Fixed cost / Revenue per unit- Variable cost per unit

                                        = 100000/ (6000000- 20000-30000)

                                         = $0.02

4. From you answer above, prove that the operating income is 0 at break even.

Operating income

5. As a manager, explain the implication of this outcome for the fiscal year.