Quiz 9: Flexible Budgeting and Variance Analysis

Business

Variance refers to the difference between actual expenses and the estimated or budgeted expenses. Such variances are investigated in order to identify the cause of variance and further actions are taken by the managers to control the causes of variances. Managers generally put an effort towards the understanding of variances better and anticipate the causes which can be occurred in future. Manager compares the line by line of actual and budgeted expenses for each department or cost center of the heath care organization. Difference between the actual and budgeted expenses will always occur. If entire variances are investigated by the managers then a great deal of time will be wasted. Thus manager should investigate only that variance which needs more attentions. Thus, it can be concluded that given statement is img

Price variance: Price variance is the difference between actual price and estimated price. It can be calculated as img Quantity Variance: Quantity variance is difference between the budgeted quantity used and actual quantity used. It is calculated as: img Volume Variance: Volume is the difference between adjusted budget and original budget. img It is required to calculate following variance by using given data: img a. Provided Original budget is $1,200 and Actual Expenditures is $1,026: Total Variance: img Thus, Total variance is unfavorable img b. Volume variance: img img Thus, Volume variance is favorable img c. Quantity variance: img img Thus, Quantity Variance is favorable img d. Price variance: img img Thus price variance is img

Variance of a variable is defined as the difference between the actual, observed values of the variable from the expected or the predicted values of the variable. Volume variance can be calculated by the following formula: img img Actual quantity of output img Budgeted quantity of input per unit of output img Budgeted quantity of output img Budgeted price of input per unit of output Now, substituting the given values in the above formula img img Since the actual volume exceeds the budgeted quantity, hence volume variance is calculated to be negative as img units. Quantity variance can be calculated by the following formula: img Where, img Actual quantity of output img Budgeted price of input per unit of output img Actual quantity of input per unit of output img Budgeted quantity of input per unit of output Now, substituting the given values in the above formula img img Since, the actual quantity at budgeted price exceeds the budgeted quantity, quantity variance is positive and evaluated as img Price variance can be calculated by the following formula: img Where, img Actual quantity of output img Budgeted price of input per unit of output img Actual quantity of input per unit of output img Actual price of input per unit of output Now, substituting the given values in the above formula img img Since, the actual quantity at actual price is less than actual quantity at budgeted price, price variance is negative to be img Total variance is the sum of quantity variance, volume variance and price variance. img Volume variance is negative indicating lesser number of patients against the expected number which is an unfavorable outcome for revenues. Positive Quantity variable is unfavorable because the amount of labor per patient has increased. Price variance is negative indicating a fall in pay rate per labor which is beneficial for revenues.