Question

Managing with Budget Variances

Ruth was the chief nursing officer of a midsized hospital in a southwestern community. The hospital had experienced a number of very difficult years and had gradually lost market share to some of the newest market entrants. In its latest strategic plan, achieving competitive efficiencies had become a key priority. To accomplish this aim, the hospital would need to cut 10 percent of its costs. Because she managed the largest portion of hospital personnel, she was asked to defend the recent actual results against the budget, specifically for salary and related costs. She received the following data:

	Budgeted	Actual
Adjusted Patient Days	210,000	178,000
Net Revenues	52,000,000	51,285,000
Salary Costs	22,000,000	19,435,000
Other	2,350,000	1,650,000
Total Costs	24,350,000	21,085,000
Contribution Margin	27,650,000	30,200,000

Analyze the data using volume, price, and efficiency variance.

Questions

Did Ruth's hospital achieve its 10 percent reduction in salary costs?

What effects did volume, price, and efficiency have on the outcomes?

What would you present to justify the financial results?

Answer 1

		Budgeted	Budgeted Per unit price	Actual based on budgeted price	Actual	Actual per unit Price
	Adjusted Patient days	210000		178000	178000
	Net Revenues	52000000	247.62	4,40,76,190.48	51285000	288.12
	Salary Costs	22000000	104.76	1,86,47,619.05	19435000	109.19
	Other	2350000	11.19	19,91,904.76	1650000	9.27
	Total Costs	24350000		2,06,39,523.81	21085000
	Contribution Margin	27650000	131.6666667	2,34,36,666.67	30200000	169.66
	As we can see from the above analysis, the budgeted salary costs adjusted patient days should be 104.76 but as per actual adjusted patient days and based on salary costs the per patient days salary costs is 109.19. Hence Ruth's hospital was not able to achieve the 10 percent reduction in salary costs infact the salary costs has increased
	Though the adjusted patient days actually achieved was less than the budgeted, the hospital provided the service for more cost that is 288.12 instead of 247.62 due to which the hospital was able to achieve the contribution margin
	The hospital achieved the contribution margin by providing the services at higher rate per patient days
	As per the budgeted per patient days the contribution margin should be 23436666.67
	The increase in salary costs was compensated by increase in revenue per patient days
	The Hospital was able to reduce the other costs to 9.27 from 11.19
	Contribution margin patient days
	Budgeted	Actual
Revenue	247.62	288.12
Salary costs	-104.76	-109.19
Other costs	-11.19	-9.27
Contribution Margin	131.67	169.66
% of contribution margin	53.17%	58.89%