A hospital’s accounting team routinely computes expense variances using a “three

Question

A hospital’s accounting team routinely computes expense variances using a “three way” model using “price”, “efficiency”, and “volume” variances when comparing actual expenses each month to a fixed budget. In February total costs for the supplies to perform its lab tests were $50,000 compared to a fixed budget of $60,000. In the “three way analysis” the “price” variance was computed to be an unfavorable $5,000 (U); the “efficiency” variance was computed to be a favorable $6,000 (F). Given this information, what was the “volume” variance and be sure to note whether it was favorable (F) or unfavorable (U).

Explanation / Answer

Total cost ariance = budgeted cost - actual cost

= $60000 - $50000

= $10000

Cost variance = Price variance + efficiency variance + volume variance

$10000 = ($ 5000) + $6000 + volume variance

Volume variance = $ 9000 (F)

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