Variance Analysis Project 6. You have been asked to explain the causes for a cha
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Question
Variance Analysis Project
6. You have been asked to explain the causes for a change in the charges for MS-DRG 445 from 2006 to 2011. Charge profiles are presented below:
Units Provided Charge/Unit Total Charge
2006 2011 2006 2011 2006 2011
Routine Care 10 7 $200 $400 $2,000 $2,800
Special Care 2 1 400 560 800 560
Pharmacy 1 1 95 125 95 125
Radiology 9 1 65 585 585 585
CT Scan 0 1 300 300 0 300
Lab 1 1 185 185 185 185
$3,665 $4,555
Compute price and efficiency variances for all departments.
Use the following data to calculate the variances in problems 7–10.
You have been asked by management to explain the variances in costs under your inpatient capitated contract. The following data is provided.
Budget Actual
Inpatient Costs $12,568,500 $16,618,350
Members 42,000 42,000
Admission Rate 0.070 0.095
Case Mix Index 0.90 0.85
Cost per Case (CMI = 1.0) $4,750 $4,900
7. What dollar amount of the total variance is attributed to Enrollment Variance?
8. What dollar effect did the increased admission rate have on cost?
9. The intensity of care delivered dropped from a budgeted case mix of 0.90 to an actual case mix of 0.85. What dollar effect did this have on actual costs?
10. Costs per case increased to $4,900 from a budgeted value of $4,750. This increased actual total costs by what amount?
Use the following data to calculate the variances in problems 11–13.
The following information has been prepared for a home health agency:
Budget Actual
Wage Rate per Hour $16.00 $17.00
Fixed Hours 320 320
Variable Hours per Relative
Value Unit (RVU) 1.0 1.1
Relative Value Units (RVUs) 1,000 1,200
Total Labor Hours 1,320 1,640
Labor Costs $21,120 $27,880
Cost per RVU $21.12 $23.23
Budgeted costs at actual volume would be $25,344 ($21.12 × 1,200), and the total variance to be explained is $2,536 Unfavorable ($27,880 – $25,344). Be sure to specify whether the variance is favorable or unfavorable.
11. What is the amount of variance that is attributed to the difference between the budgeted and actual wage rate per hour?
12. What is the amount of variance that is attributed to the change in labor productivity?
13. What is the amount of variance that can be attributed to the difference between budgeted and actual volume?
Use the following information for problems 14–16.
The administrator of Appomattox Nursing Home is very aware of needing to keep his cost down since he just negotiated a new arrangement with a large insurance company that will pay him a fixed amount per patient day. Listed below are budgeted and actual expenses for the previous month.
Actual patient days were 30,000 compared to budgeted patient days of 24,000.
Budgeted Costs @ 24,000 Patient Days
Budgeted Cost Per Unit
Actual Costs @ 30,000 Patient Days
Pharmacy Costs Variable
$100,000
$4.167
$140,000
Misc Supplies Costs Variable
$56,000
$2.333
$67,500
Fixed Overhead Costs
$708,000
$29.50
$780,000
Total
$864,0000
$36.00
$987,500
14. Determine the total variance associated with the planned and actual expenses.
15. Prepare a flexible budget of expense at 30,000 patient days.
16. Determine the “Spending Variance” which is defined as Actual costs less costs budgeted at actual volume.
Use the following information for problems 17–19.
A dermatology clinic expects to contract with an HMO for an estimated 80,000 enrollees. The HMO expects 1 in 4 of its enrolled members to use the dermatology services per month.
At the end of the year, the dermatology clinic’s business manager looked at her monthly figures and saw that the number of enrolled members had increased by 5% over the budgeted amount, and that 1 in 3 of the total HMO members had used the dermatology services per month.
Actual and budgeted statistics are presented below. The total variance is $70,000 and is unfavorable:
Budgeted
Actual
Enrollees
80,000
84,000
Usage Rate
0.25
0.3333
Visits
20,000
28,000
Cost
$200,000
$270,000
Cost Per Visit
$10.00
$9.643
17. Determine the enrollment variance for the month.
18. Determine the utilization variance for the month.
19. Determine the efficiency variance for the month.
Budgeted Costs @ 24,000 Patient Days
Budgeted Cost Per Unit
Actual Costs @ 30,000 Patient Days
Pharmacy Costs Variable
$100,000
$4.167
$140,000
Misc Supplies Costs Variable
$56,000
$2.333
$67,500
Fixed Overhead Costs
$708,000
$29.50
$780,000
Total
$864,0000
$36.00
$987,500
Explanation / Answer
Answer (6)
Price Variance = Actual Units * (Actual Price – Budgeted Price)
Routine Care = 7 * (400 – 200) = 7 * 200 = $ 1,400
Special Care = 1 * (560 – 400) = $ 160
Pharmacy = 1 * (125 - 95) = $ 30
Radiology = No Variance as it appears to be a fixed charge
CT Scan = No variance on account of price because of fixed charge
Lab = No variance
Efficiency Variance = (Actual Units – Budgeted Units) * Budgeted Price
Routine Care = (7 – 10) * 200 = -$ 600
Special Care = (1-2) * 400 = - $560
Pharmacy = (1-1) * 95 = 0
Radiology = No variance as it appears a fixed charge
CT Scan = $ 300 due to one unit processed though it appears to be a fixed charge
Lab = No Variance
Answer (7)
Actual Members &Budgeted Members = 42000
Actual Admission Rate = 0.095
Budgeted Admission Rate = 0.070
Variance attributable to Enrollment = Actual Members (Actual Admission Rate – Budgeted Admission rate)
Variance = 42000 * (0.095 – 0.070) = 42000 * 0.025 = 1,050
Answer (8)
$ Budgeted cost = Members * Budgeted admission rate * budgeted case mix ratio * budgeted cost
= 42000 * 0.070 * 0.90 * 4750 = $ 12,568,500
$ Actual Cost = Members *Actual Admission rate * budgeted case mix ratio * budgeted cost
= 42000 * 0.095 * 0.90 * 4750 = $ 17,057,250
Effect of increased admission rate = $ 17,057,250 - $ 12,568,500 = $ 4,488,750
Answer (9)
Changed Case Mix ratio from 0.90 to 0.85
$ Budgeted Cost = Members * Budgeted admission rate * budgeted case mix ratio * budgeted cost
= 42000 * 0.070 * 0.90 * 4750 = $ 12,568,500
$ Actual Cost = Members *Budgeted Admission rate * actual case mix ratio * budgeted cost
= 42000 * 0.070 * 0.85 * 4750 = $ 11,870,250
Effect of decreased Case Mix Ratio = $ 11,870,250 - $ 12,568,500 = ($ 698,250) ( negative value)
Answer (10)
Cost per case increased from $ 4750 to $ 4900
$ Budgeted cost = Members * Budgeted admission rate * budgeted case mix ratio * budgeted cost
= 42000 * 0.070 * 0.90 * 4750 = $ 12,568,500
$ Actual Cost = Members *Budgeted Admission rate * budgeted case mix ratio * actual cost
= 42000 * 0.070 * 0.90 * 4900 = $ 12,965,400
Effect of increased patient cost = $ 12,965,400 - $ 12,568,500 = $ 396,900
Answer (11)
Budgeted Wage Rate = $ 16
Actual Wage Rate = $ 17
Variance attributable to budgeted and actual wage rate = Actual labour hours * (budgeted wage rate – actual wage rate)
Variance = 1640* (16 – 17) = 1640 * -1 = ($ 1,640) (negative value)
Answer (12)
Actual Labour hours = 1640
Budgeted Labour hours = 1320
Budgeted Labour cost = 16
Variance Attributable to Labour Productivity = (Actual Labour Hours – Budgeted Labour Hours) * Budgeted labour cost
Variance = (1640 – 1320) * 16 = 320 * 16 = $ 5,120
Answer (13)
Variance attributable to volume = (Actual No of Units - Budgeted No of Units) * Budgeted cost
No of units here indicates Relative Value Units
Variance attributable to Volume = (1200 – 1000) * 21.12 = 200 * 21.12 = $ 4,224
Answer (14)
Total Planned Expenses = Budgeted patients * budgeted cost = 24000 * 36 = $ 864,000
Actual Expenses = $ 987,500
Variance = Actual Expenses – Planned Expenses = 987500 – 864000 = $ 123,500
Answer (15)
Budget of Expenses at 30000 patient days
Pharmacy Costs = patient days * Budgeted cost = 30000 * 4.167 = $ 125,010
Misc Supplies cost = Patient days * Budgeted cost = 30000 * 2.333 = $ 69,990
Fixed Overhead Costs = $ 708,000
Total Budget of Expenses at 30000 patient days = $ 903,000
Answer (16)
Spending Variance = Actual Costs – Costs Budgeted at Actual Volume
= $ 987,500 - $ 903,000 = $ 84,500
Answer (17)
Budgeted Enrollees = 80000
Actual Enrollees = 84000
Enrollment Variance = 84000 – 80000 = 4000
Answer (18)
Actual Utilization at standard (estimated) usage rate = Actual enrollees * standard usage rate
= 84000 * 0.25 = 21000
Actual Utilization at Actual usage rate = Actual enrolees * actual usage rate
= 84000 * 0.3333 = 28000 (rounded off)
Utilization Variance = Actual Utilization at Actual rate – Actual Utilization at Standard rate
Utilization Variance = 28000 – 21000 = 7000
Answer (19)
Efficiency Variance = Actual Visits * Actual Cost - Actual Visits * standard cost
Efficiency Variance = 28000 * 9.643 – 28000 * 10 = 270000 – 280000 = - 10,000
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