Managing with Budget Variances Ruth was the chief nursing officer of a midsized
ID: 2618355 • Letter: M
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:
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?
Actual Adjusted Patient Days Net Revenues Salary Costs Other Total Costs Contribution Margin Budgeted 210,000 $52,000,0oo $22,000,ooo $ 2,350,0oo $24,350,0oo $27,650,0oo 178,000 $51,285,0oo $19,435,00o $ 1,650,0o0 $21,085,00o $30,200,0ooExplanation / Answer
Did Ruth's hospital achieve its 10 percent reduction in salary costs?
Yes Ruth's hospital achieve its 10 percent reduction in salary costs.
Salary costs budgeted is $22,000,000 and actual is $19,435,000
10% of $22,000,000 is $ 2,200,000 so 10% reduction means actual should be 198,000,000.
Infact it acheieved more than 10% reduction in salary costs
What effects did volume, price, and efficiency have on the outcomes?
As volume increases means the patients will increase and so obiviously our revenue will increase. and so our other costs will also increase.
As price increases our revenues also increase because we are now charging more from each patient.
Efficiency plays an important role here because as volumes increase revenue will increase but if our efficiency is less means our costs will increase and so there is no benefit. So if we improve our efficiency we can serve the patients with less cost and then our profits will increase.
What would you present to justify the financial results?
If we carefully observe our results our contribution margin increased even though our revenues fell, its because we reduces our total costs and in turn it means our efficiency increased
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