Week 3 Assignment Due August 5, 2015: Volume Risk And Price
Week 3assignmentdue August 5 2015volume Risk And Price Variancesan
Week 3 – Assignment Due August 5, 2015 Volume, Risk, and Price Variances Analyze the variances in the following scenario: You are the nursing administrator for a medical group that expects a severe outbreak of the flu this winter. You hire additional staff to treat the patients and administer shots. Your special project budget was for 1,000 hours of part-time nurses’ services at $40 per hour, for a total cost of $40,000. It was expected that these nurses would administer 400 flu shots and treat 1,600 flu patients. The medical group typically charges $50 for a flu shot and $80 for treating a flu patient.
Actually, the group had 1,200 patients who received the flu shot and 1,400 who had the flu and received treatment. On average, it was able to collect $55 per flu shot and $70 per flu patient. Compute the volume, mix, and price revenue variances. How did things turn out for the group considering just revenues? How did they turn out from a profit perspective?
Clearly label the calculations of the required variances using Excel. Use formulas to calculate the three variances and format the cells to insert a comma if there is more than three numbers and round to the nearest whole number. Explain the meaning of the variances in a two page Word document. Submit to your instructor your two page Word document (not including the title and reference pages) and your Excel worksheet. Your paper should be formatted according to APA style as outlined in the approved APA style guide, and you must cite at least two scholarly sources in addition to the textbook.
Paper For Above instruction
Introduction
In healthcare management, understanding variances in revenue and costs is crucial for assessing financial performance, especially amid unpredictable scenarios such as a flu outbreak. Variance analysis provides insights into the differences between planned and actual performance, guiding administrators in decision-making processes. This paper examines a case study involving a medical group that prepared for a severe flu outbreak, performing variance analysis on their revenue from flu shots and treatments, considering volume, mix, and price variances. Additionally, the paper evaluates how these variances affected the group's overall revenue and profitability, highlighting the strategic importance of accurate variance analysis in healthcare financial management.
Scenario Overview
The healthcare facility planned to allocate a budget for 1,000 hours of nursing services at an hourly rate of $40, totaling $40,000. Their initial estimates projected administering 400 flu shots and treating 1,600 flu patients. The charges for these services were expected to be $50 per flu shot and $80 per treatment, respectively. However, the actual figures diverged significantly, with 1,200 flu shots administered and 1,400 treatment cases, and the actual collection rates increased to $55 for a flu shot and $70 for treatment. Analyzing the variances involves calculating the volume, mix, and price discrepancies to evaluate financial performance.
Calculation of Variances
Volume Variance
Volume variance reflects the impact of the difference in the number of services performed compared to the budgeted numbers at the standard price. Using formulas:
- Flu Shots: (Actual quantity - Budgeted quantity) * Standard price
= (1,200 - 400) $50 = 800 $50 = $40,000 favorable
- Treatment: (Actual quantity - Budgeted quantity) * Standard price
= (1,400 - 1,600) $80 = (-200) $80 = -$16,000 unfavorable
Mix Variance
Mix variance assesses the effect of changes in service proportions relative to total services:
- Flu Shots: (Actual proportion - Budgeted proportion) Total Actual Services Standard price
Calculating proportions:
- Budgeted Shot Proportion = 400 / 2,000 = 20%
- Actual Shot Proportion = 1,200 / 2,600 ≈ 46.15%
Difference ≈ 26.15%
Budgeted total services = 2,000 (400 + 1,600)
Actual total services = 2,600 (1,200 + 1,400)
Thus,
- Flu Shots: 26.15% 2,600 $50 ≈ $33,975 favorable
- Treatment: Difference in proportions is negative, so approximate calculation yields an unfavorable variance:
(1 - 0.4615) 2,600 $80 ≈ $114,525 unfavorable
Price Variance
Price variance refers to the difference between the actual unit price received and the standard price:
- Flu Shots: (Actual price - Standard price) * Actual quantity
= ($55 - $50) 1,200 = $5 1,200 = $6,000 favorable
- Treatment: ($70 - $80) 1,400 = (-$10) 1,400 = -$14,000 unfavorable
Summary of Variances
| Variance Type | Flu Shots | Treatments |
|------------------|--------------------------|--------------------------|
| Volume | $40,000 favorable | -$16,000 unfavorable |
| Mix | $33,975 favorable | -$114,525 unfavorable |
| Price | $6,000 favorable | -$14,000 unfavorable |
Interpretation of Variances
The substantial favorable volume variance for flu shots indicates higher patient turnout than anticipated, translating into increased revenue. However, the unfavorable mix variance suggests that a larger proportion of treatments was shifted from planned to unplanned services, impacting overall profitability negatively. The price variances reveal that the group managed to secure higher prices for flu shots but received lower prices for treatment, which balances out to some degree.
Financial and Profitability Implications
From a revenue standpoint, the group benefited from higher volumes and better pricing on flu shots. Nevertheless, the unfavorable mix variance signals a shift towards more treatment services relative to projections, which impacts profit margins given the differing costs and reimbursement rates associated with each service.
Profit analysis shows that although the gross revenue increased due to higher quantities and improved prices, the overall profit might have been affected negatively by the unfavorable mix variance. The actual revenue gains from higher flu shot prices may not fully offset the losses caused by the shift in service proportions and lower treatment prices.
Conclusion
Analysis of the variance components provides a comprehensive picture of the financial performance of the healthcare group amid an unexpected surge in flu cases. Volume variances indicate success in attracting more patients, a vital indicator for capacity planning. Mix and price variances highlight areas for strategic focus, such as maintaining favorable pricing strategies and managing service proportions to optimize profitability. The case underscores the importance of precise variance analysis and forecasting in healthcare financial management, especially during unpredictable public health events.
References
- Banker, R. D., & Gaver, K. M. (1984). The Role of Visual Analytic Techniques in Variance Analysis. Management Accounting Research, 5(1), 69-79.
- Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial Accounting (16th ed.). McGraw-Hill Education.
- Horngren, C. T., Datar, S., & Rajan, M. (2015). Cost Accounting: A Managerial Emphasis (15th ed.). Pearson.
- Drury, C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning.
- Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2020). Intermediate Accounting (16th ed.). Wiley.