Instructions:

Questions:

8.2 Briefly describe the planning process. Be sure to include summaries of the strategic, operating, and financial plans.

8.7 What is variance analysis?

Problems:

8.1 Consider the following 2015 data for Newark General Hospital (in millions of dollars): Calculate and interpret the profit variance.

=Actual profit-Static profit

=\$0.3-\$0.6

=-\$0.3

There is an unfavorable profit variance which means that the company earned less that it prepared for.

Calculate and interpret the revenue variance.

=Actual revenues-Static Revenues

=\$4.5-\$4.7

=-\$0.2

There is an unfavorable revenue variance, because the company sold less than it planned for.

Calculate and interpret the cost variance.

=Static Cost-Actual Cost

=4.1-4.2

=-\$0.1

There is an unfavorable cost variance, this means that the company spent more than it planned for.

Calculate and interpret the volume and price variances on the revenue side.

Volume variance=Flexible Revenue-Static Revenue

=\$4.8-\$4.7=\$0.1

Favorable because the company sold more units than it planned for.

Price variance=Actual Revenues-Flexible Revenues

=\$4.5-\$4.8=-\$0.3

The answer is unfavorable because the company sold it products at a lower price than plan which might have actually resulted to the increase in actual volume sold.

Calculate and interpret the volume and management variances on the cost side.

Volume variance=Static cost –Actual Cost

=\$4.1-\$4.1=\$0

Favorable which means that regardless of the fact that the company sold more units, the company produce the same number of units it plan for.

Management variance=Flexible Cost –Actual Costs

=\$4.1-\$4.2=\$0.1

This is unfavorable which means that maybe as a result of the higher units sold, the company had to spend more in servicing these units resulting to cost inefficiency for the period.

How are the variances calculated above related?

The above variances are associated, as the increase in volume, should increase the revenue and cost proportionality. However, it has not increased in the same portion. Therefore, there are unfavorable variances.

8.3 Here are the budgets for Brandon Surgery Center for the most recent historical quarter (in thousands of dollars): The center assumes that all revenues and costs are variable and hence tied directly to patient volume.

Answer:A The flexible budget uses the actual number of surgeries, which are 1,300.

Patient revenue is recast using the actual volume, 1,300, and the original (static) budget estimate for revenue per procedure:

\$2,400,000 / 1,200 = \$2,000.

The flexible budget revenue amount is: 1,300 x \$2,000 = \$2,600,000.

The same is applied to salary expense.

The static budget has set in it an expense per procedure: \$1,200,000 / 1,200 = \$1,000.

Coupled with an actual volume of 1,300, the flexible budget line for salary expense is 1,300 x \$1,000 = \$1,300,000.

Non-salary expenses are handled in the same way: 1,300 x (\$600,000 / 1,200) = \$650,000.

The profit line is merely patient revenue less salary expense less non-salary expense.

Dollar total variance = Actual budget amount – Static budget amount    =

\$2,535,000 – \$2,400,000   = \$135,000.

% Total variance = \$135,000 / \$2,400,000 = 0.0562 = 5.62%

Dollar volume variance = Flexible budget amount – Static budget amount

= \$2,600,000 – \$2,400,000     = \$200,000

% Volume variance    = \$200,000 / \$2,400,000 = 0.0833 = 8.33%

Dollar management variance =Actual budget amount –Flexible budget amount      = \$2,535,000 – \$2,600,000 = -\$65,000

% Management variance = -\$65,000 / \$2,400,000 = -0.0271 = -2.71%

Dollar check calculation= \$200,000 + (-\$65,000) = \$135,000

% Check calculation = 8.33% + (-2.71%) = 5.62%

Salary Expense

Dollar total variance = Actual budget amount – Static budget amount   =

\$1,365,000 – \$1,200,000 Profit = \$165,000

% Total variance = \$165,000 / \$1,200,000 = 0.1375 = 13.75%

Dollar volume variance = Flexible budget amount – Static budget amount

= \$1,300,000 – \$1,200,000 = \$100,000

% Volume variance = \$100,000 / \$1,200,000 = 0.0833 = 8.33%

Dollar management variance = Actual budget amount – Flexible budget amount = \$1,365,000 – \$1,300,000 = \$65,000

% Management variance = \$65,000 / \$1,200,000 = 0.0542 = 5.42%

Dollar check calculation = \$100,000 + \$65,000 = \$165,000

% Check calculation = 8.33% + 5.42% = 13.75%.

Non-Salary Expense

Dollar total variance = Actual budget amount – Static budget amount

= \$585,000 – \$600,000 = -\$15,000

% Total variance = -\$15,000 / \$600,000 = -0.025 = -2.50%

Dollar volume variance = Flexible budget amount – Static budget amount

= \$650,000 – \$600,000=\$50000

% Volume variance = \$50,000 / \$600,000 = 0.0833 = 8.33%

Dollar management variance = Actual budget amount – Flexible budget amount

= \$585,000 – \$650,000 = -\$65,000

% Management variance = -\$65,000 / \$600,000 = -0.1083 = -10.83%

Dollar check calculation = \$50,000 + (-\$65,000) = -\$15,000

% Check calculation = 8.33% + (-10.83%) = -2.50%

Profit

Dollar total variance = Actual budget amount – Static budget amount

= \$585,000 – \$600,000 = -\$15,000

% Total variance = -\$15,000 / \$600,000 = -0.025 = -2.50%

Dollar volume variance = Flexible budget amount – Static budget amount

= \$650,000 – \$600,000 = \$50,000

% Volume variance = \$50,000 / \$600,000 = 0.0833 = 8.33% Dollar management variance = Actual budget amount – Flexible budget amount = \$585,000 – \$650,000 = -\$65,000

% Management variance = -\$65,000 / \$600,000 = -0.1083 = -10.83%

Dollar check calculation = \$50,000 + (-\$65,000) = -\$15,000

% Check calculation = 8.33% + (-10.83%) = -2.50%

Profit variances and non-salary expense variances are the same. This occurs not because of some economic tie but as a consequence of the values used in the problem.

Volume variance is a positive 8.33% in all cases. Because the variance in volume itself is 100 / 1,200 = 0.0833 = 8.33%, each volume adjusted dollar amount on the flexed budget changes by that same amount as compared with the static budget.

The actual budget contains values affected by both volume changes and changes in other (management) variables.

Answer:C It is very useful to know how to calculate and interpreted the variances. It helps managers to make the financial decisions.

The profit variances appear to be \$15,000 (2.50%) that is below as compared to what was expected.  However, if the management variables proved to be in line with the original forecast, increased volume alone would have produced a \$50,000 (8.33%) profit surplus (as compared to budget). The fact that variables under management control led to a \$65,000 (10.83%) shortfall produced the overall profit shortfall. Patient revenue, in total it was \$135,000 (5.62%) above budget.

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