Consider the following 2016 data for Newark Hospital (in millions of dollars) Simple Budget Flexible Budget...

Consider the following 2016 data for Newark Hospital (in millions of dollars)

	Simple Budget	Flexible Budget	Actual Results
Revenues	$4.7	$4.8	$4.5
Costs	4.1	4.1	4.2
Profit	0.6	0.7	0.3

a. Calculate and interpret the two profit variances

b. Calculate and interpret the two revenue variances.

c. Calculate and interpret the two cost variances.

d. how are the variances related

Answer a-d.

Solutions

Expert Solution

a. Profit variance in case of simple budget = 0.6 - 0.3 = 0.3 (unfavorable)

Profit variance in case of flexible budget = 0.7 - 0.3 = 0.4 (unfavorable)

Flexible budget calculates the profit at the actual output level, using the budgeted costs and revenue per unit. Simple budget does not consider the actual output, but the budgeted output.

b. Revenue variance in case of simple budget = 4.7 - 4.5 = 0.2 (unfavorable)

This means that the hospital is earning lesser revenue than budgeted.

Revenue variance in case of flexible budget = 4.8 - 4.5 = 0.3 (unfavorable)

This means that at the actual level of output i.e the number of patients treated, is more than the budgeted patients, causing an increase in flexible budget revenue.

c. Simple budget cost variance = 4.1 - 4.2 = 0.1 (unfavorable)

Flexible budget cost variance = 4.1 - 4.2 = 0.1 (unfavorable)

The simple budget cost variance is unfavorable, meaning that at the budgeted levels of output, actual cost is more than the budgeted cost.

The flexible budget cost variance is also unfavorable, meaning that at the actual level of output, actual cost is more than the budgeted cost.

d. The 2 variances are related in the sense that that the level of output is different in case of simple and flexible budget, while the per unit revenue or cost is same in both the budgets.

Suppose the hospital treats 10 patients actally, with revenue per patient = $5. Actual total revenue = 10*5 = 50.

Budgeted patients to be treated = 11. Budgeted revenue per patient = $4.5

Simple budget revenue = 11*4.5

Flexible budget revenue = 10*4.5

Actual revenue = 10*5

Simple variance = 11*4.5 -10*5

Flexible variance = 10*4.5 - 10*5

Thus the only part changing between the simple variance and flexible variance is that simple variance is using 11 patients for budgeted revenue, while fexible variance is using 10 patients for budgeted revenue.

jeff jeffy answered 6 months ago

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