1. Part V: Plan, Monitor and Control Financial Operations
CHAPTER 13:
BUDGETING AND
VARIANCE ANALYSIS

2. an organization’s performance standards set out performance levels.
Budget Types
An organization’s objectives define specific activities; how they are assembled; and levels of operation
while
an organization’s performance standards set out performance levels.
A budget quantifies these activities into financial terms.

3. Budget Types Static Budgets
Are essentially based on a single level of operations. That level of operations — or volume — is never adjusted during the budget period.
It doesn’t move - therefore it is “static”.

4. Budget Types Flexible Budgets
Are based on a level of operation that will change. In other words, the level of operations — or volume — is adjusted to show change during the budget period.
It is adjusted, or flexed - therefore it is “flexible”.

5. To review a budget, the manager needs to know
Budget Review
To review a budget, the manager needs to know
How the budget report format is constructed
More details are in the chapter.

6. To review a budget, the manager needs to know
Budget Review
To review a budget, the manager needs to know
How to annualize partial year expenses
More details are in the chapter.

7. Remember, building a budget means making a series of assumptions.
Building Budgets
The budget process should begin with a review of the strategy and objectives.
Remember, building a budget means making a series of assumptions.

8. To build a budget, a manager must consider
Building Budgets
To build a budget, a manager must consider
The workload forecast (it must tie into the forecasted volume)
Whether budget projects will use resources during the budget period.
Whether budget operations will be placed under unusual or inconvenient circumstances during the budget period (remodeling, for example).
More details are in the chapter.

9. Budget: Example $21,600,000 22,000,000 $ (400,000) Revenue Expenses
$ (400,000)
Revenue
Expenses
Excess of Expenses over Revenue
Step Actual
Step Budgeted
$24,000,000
22,400,000
$ 1,600,000
Revenue
Expenses
Excess of Revenue over Expenses
$(2,400,000)
(400,000)
$(2,000,000)
$24,000,000
22,400,000
$ 1,600,000
$21,600,000
22,000,000
$ (400,000)
Revenue
Expenses
Excess of Expenses over Revenue
Step Actual Budgeted Static Budget Variance

10. Static Budget Variance
Budget Exercise
$17,550,000
4,400,000
$21,950,000
$16,100,000
4,000,000
$20,000,000
$ 1,850,000
Revenue – Inpatient
Revenue – Outpatient
Subtotal
Expenses – Inpatient
Expenses – Outpatient
Excess of Expenses over Revenue
Actual
Step 1.
$19,500,000
4,000,000
$23,500,000
$18,000,000
3,800,000
$21,800,000
$ 1,700,000
Revenue – Inpatient
Revenue – Outpatient
Subtotal
Expenses – Inpatient
Expenses – Outpatient
Excess of Expenses over Revenue
Budgeted
Step 2.
$(1,950,000)
400,000
$(1,550,000)
$(1,900,000)
200,000
$(1,700,000)
$ ,000
$19,500,000
4,000,000
$23,500,000
$18,000,000
3,800,000
$21,800,000
$ 1,700,000
$17,550,000
4,400,000
$21,950,000
$16,100,000
$20,000,000
$ 1,850,000
Revenue – Inpatient
Revenue – Outpatient
Subtotal
Expenses – Inpatient
Expenses – Outpatient
Excess of Expenses over Revenue
Static Budget Variance
Budgeted
Actual
Step 3.

11. Budgets and Variance Analysis
A variance is the difference between standard and actual prices and quantities.
Flexible budgeting variance analysis provides a method to get more information about the composition of departmental expenses.

12. This method subdivides variance into
Variance Analysis
This method subdivides variance into
3 types:
Volume
Use (or quantity)
Spending (or price)

13. Volume variance represents
Variance Analysis
Volume variance represents
Portion of the overall variance caused by a difference between the expected workload and the actual workload.
Calculated as the difference between the total budgeted cost,* expected workload and the amount that would have been budgeted had the actual workload been known in advance.
* Defined as standard hours for actual production.
Study text and illustration in the chapter.

14. Use (or quantity) variance represents
Variance Analysis
Use (or quantity) variance represents
Portion of the overall variance caused by a difference between the budgeted and actual quantity of input needed per unit of output.
Calculated as the difference between the actual quantity of inputs used per unit of output multiplied by the actual output level and the budgeted unit price.
Study the text and illustrations in the chapter.

15. Spending (or price) variance represents
Variance Analysis
Spending (or price) variance represents
Portion of the overall variance caused by a difference between the the actual and expected price of an input.
Calculated as the difference between the actual and budgeted unit price (or hourly rate) multiplied by the actual quantity of labor consumed (or supplies, etc.) per unit of output and by the actual output level.
Examine the text and illustrations in the chapter.

16. Can be performed as 2-variance or 3-variance analysis.
2-variance compares volume variance to budgeted costs*
3-variance compares volume variance, use variance, and spending variance.
* Defined as standard hours for actual production.
Study text and illustrations shown in the chapter.

17. Variance Analysis: Example
Our variance analysis example and practice exercise use the flexible budget approach.
A flexible budget is one that is created using budgeted revenue and/or budgeted cost amounts.
A flexible budget is adjusted, or flexed, to the actual level of output achieved (or perhaps expected to be achieved) during the budget period.
A flexible budget thus looks toward a range of activity or volume (versus only one level in the static budget).
Examples of how the variance analysis works are shown in:
Figure 13-1 (the elements) Page 130
Figure 13-2 (the composition) Page 131
Figures 13-3 and 13-4 (the calculation) Page 131
Study these examples before undertaking the Practice Exercise.

18. Variance Analysis: Practice Solution #1
Actual Costs Flexible Budget Budgeted Costs
(based on actual quantity)
687,000RVUs x $4.70 per RVU ,000RVUs x $5.00per RVU ,000 RVUs x $5.00per RVU =$3,228, = 3,435, = 3,250,000
Price Variance Quantity Variance
206, ,000
(favorable) (unfavorable)

19. Variance Analysis: Practice Solution #2
Worksheet 1
Applied Overhead Costs
Less: Budgeted Overhead Costs
Volume Variance (favorable)
Worksheet 2
Less: Budgeted Overhead Costs at 24,000 hours
Budget Variance (unfavorable)
Worksheet 3
Volume Variance = favorable
Less: Budgeted Variance = unfavorable
Net Variance (favorable)
Routine Services Nursing
$56,400
(48,000)
$8,400
Laboratory
$82,920
(71,000)
$11,920
$49,000
$1,000
$71,200
$200
(1,000)
$7,400
(200)
$11,720
Routine Services Nursing
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Laboratory
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