Verifying the Variance

 

A financial manager’s responsibilities do not cease after he or she develops a budget for execution. On the contrary, the manager’s job begins with a completed budget. The manager must track the execution of the budget approved by senior leadership to meet financial goals. Since trends, costs, and other externalities can cause changes or variances in the budget, the financial manager must monitor and adjust spending when necessary to account for those variances.

Even with relatively good control, taxes, rounding effects, and unexpected price increases can negatively affect budget execution. Nickels and dimes add up quickly. If unaccounted for and not closely tracked, those nickels and dimes can derail even the most carefully considered financial plan. Overspending can pose serious threats to projects and the availability of resources for future projects. Under spending can indicate a problem in quality control. Under spending may be a good thing (due to improved efficiency) or it may also be bad (manufacturers cutting corners, which may result in inferior product). The bottom line to remember is that variance happens and health care managers must respond effectively.

To prepare for this Application Assignment, review the Northeast Health System 2011 Annual Report. As you review, analyze the concept of variance. Consider what factors influence variance and how organizations control these factors in a real world setting. Analyze how the economic environment in which the organization operates influences the means of adjusting expenditures to meet financial goals.

To complete this Application Assignment, you will calculate: 1) the variance for selected items from the annual report and 2) the percentage that each expense item contributes to the overall expenses. Next, you will write a 2- to 3-page paper that explains how the variance and expense percentage calculations are used to monitor and control the budget.

You will submit both the excel spreadsheet and the 2 page paper as follows:

1. Using the provided Excel spreadsheet, calculate the variances for each line item under the tab labeled “Variances.” A guideline for calculating the variances is located in the Weekly Resources.
2. Using the provided Excel spreadsheet, calculate the expense proportion of each line item under the tab labeled “Proportional Allocations.”
3. After completing the spreadsheet, please address the following in a 2 page paper. The first paragraph should address the first two elements. The bulk of the paper should address the remaining elements.

   Explain the concept of variance. Cite your sources.
   Briefly describe the Northeast Health System from the information found in the annual report.
   Summarize the key variances (positive or negative) you uncovered during your analysis (data only). Focus on the most significant variance items.
   Summarize the key findings from your proportional allocation analysis. Focus on the most significant proportions.
   What observations can you make about the Northeast Health System based on the variances and proportional allocations that you calculated?
   What do you believe led to the variances you identified?
   Since certain line items in a budget are more controllable than others, what actions might you recommend to the Northeast Health System to either decrease or increase their significant variances and proportional allocations?

Your written assignments must follow APA guidelines. Be sure to support your work with specific citations from this week’s Learning Resources and additional scholarly sources as appropriate. 

Calculating Percentage of Variance

As managers, you will frequently engage in a practice known as variance analysis. This is where you calculate the percentage of change from one period of time to another (months, quarters, or years). Variance analysis is performed on financial statements and even departmental level budgets. The purpose of conducting a variance analysis is to assess the overall financial health of an organization or department. It will let the entity know how fast it’s growing, if it’s growing at all. It provides management with the information necessary to make business decisions which will ultimately strengthen the financial position of the entity.

The following is a step-by-step set of instructions for performing a variance analysis. For your benefit, an example has been included in each step of the process.

1) Identify the first data point. In this example, let’s assume you’re the CEO of a medical center and you want to compare the “net patient services revenue” from 2011 and 2012. The first data point will be 2011. Now let’s say the net patient service revenue, for 2011, was $50,000,000.

2) Identify the second data point. Following the same example above, your second data point will be 2012. Let’s say that the net patient service revenue, for 2012, was $45,700,000.
3) Now, subtract the first data point from the second data point. In our example, this would be $50,000,000 – $45,700,000, which would equal $4,300,000. This represents the dollar amount of change (or difference) between the two points (2011 and 2012).
4) Divide the change between the two data points by the first data point, and then multiply the result by 100. In our example, $4,300,000/$50,000,000 which comes to “.086”. So, the percentage of variance between 2011 and 2012 is .086 times 100, or 8.6 percent.
THAT’S ALL THERE IS TO IT! Although simple to calculate, it provides management with invaluable information for making operational decisions.

Variance

Analysis

2011 2010 Difference Variances

$ 422,511,540 $ 424,827,861 $ (2,316,321)

2011 2010 Difference Variance

$ (12,647,151)

																																																										Balance Sheet
Current Assets					2011					2010			Difference		Variances	Current Liabilities
Cash and cash equivalents	$ 40,659,261	$ 28,777,844	$ 11,881,417	Accounts payable and accrued expenses	$ 26,130,908	$ 24,734,107	$ 1,396,801
Patient receivables, less allowance for uncollectible accounts of $9,714,000 in 2011 and $9,059.000 in 2010	$ 39,537,718	$ 43,976,870	$ (4,439,152)	Accrued wages and vacation payable	$ 18,670,208	$ 17,364,152	$ 1,306,056
Current portion of assets whose use is limited or restricted	$ 2,953,097	$ 2,856,845	$ 96,252	Estimated third-party settlements	$ 5,888,804	$ 8,295,344	$ (2,406,540)
Supplies at cost	$ 5,996,111	$ 5,951,226	$ 44,885	Current installments on long-term debt	$ 10,270,197	$ 9,857,917	$ 412,280
Prepaid expenses and other current assets	$ 14,938,995	$ 123,343,332	$ (108,404,337)	Other current liabilities	$ 1,796,458	$ 1,979,206	$ (182,748)
Total Current Assets	$ 104,085,182	$ 93,897,107	$ 10,188,075	Total current liabilities	$ 62,756,575	$ 62,230,726	$ 525,849
Assets whose use is limited or restricted:	Other Liabilities
Assets held by trustee under bond indenture agreements	$ 5,092,814	$ 5,599,454	$ (506,640)	Accrued pension liability	$ 59,317,803	$ 43,724,071	$ 15,593,732
Assets held in professional liability trust	$ 20,295,703	$ 22,412,606	$ (2,116,903)	Post-retirement medical benefits	$ 1,980,444	$ 2,087,918	$ (107,474)
Donor-restricted assets for specific purposes	$ 6,528,093	$ 7,836,277	$ (1,308,184)	Professional liability reserves	$ 21,658,232	$ 19,644,441	$ 2,013,791
Donor-restricted assets for permanent endowment	$ 6,596,348	$ 6,532,831	$ 63,517	Other noncurrent accrued liabilities	$ 15,774,629	$ 15,897,112	$ (122,483)
Beneficial interest in irrevocable trusts	$ 3,294,812	$ 3,594,455	$ (299,643)	Total Other Liabilities	$ 98,731,108	$ 81,353,542	$ 17,377,566
Total Assets Whose Use is Limited or Restricted	$ 41,807,140	$ 45,975,623	$ (4,168,483)
Long -term debt:
Property, Plant, and Equipment	$ 172,959,339	$ 179,249,390	$ (6,290,051)	long-term debt – net of current portion	$ 121,047,107	$ 127,360,256	$ (6,313,149)
Total Liabilities	$ 282,534,790	$ 270,944,524	$ 11,590,266
Other assets:
Long-term investments	$ 90,073,102	$ 91,655,065	$ (1,581,963)	Net assets:
Unamortized financing costs	$ 3,558,415	$ 3,737,296	$ (178,881)	Unrestricted	$ 119,510,803	$ 132,157,954			$ (12,647,151)
Other noncurrent assets	$ 10,028,362	$ 10,313,382	$ (285,020)	Temporarily restricted	$ 10,574,787	$ 11,598,097	$ (1,023,310)
Total Other Assets	$ 103,659,879	$ 105,705,741	$ (2,045,862)	Permanently restricted	$ 9,891,160	$ 10,127,286	$ (236,126)
TOTAL ASSETS		$ 422,511,540		$ 424,827,861		$ (2,316,321)	Total Net Assets	$ 139,976,750	$ 153,883,337	$ (13,906,587)
TOTAL LIABILITIES AND NET ASSETS
	Income Statement
	Unrestricted Revenue and Other Support
	Net patient service revenue		$ 425,909,199		$ 425,552,477	$ 356,722
	Other revenue		$ 7,589,311		$ 8,992,300	$ (1,402,989)
	Net assets released from restrictions used for operations		$ 1,282,318		$ 1,023,688	$ 258,630
	Total unrestricted revenue and other support		$ 434,780,828		$ 435,568,465	$ (787,637)
	Expenses:
	Salaries and wages		$ 196,304,042		$ 196,599,763	$ (295,721)
	Physician salaries and fees		$ 33,901,510		$ 35,021,804	$ (1,120,294)
	Fringe benefits		$ 47,640,300		$ 46,325,951	$ 1,314,349
	Supplies and contracted services		$ 114,959,471		$ 115,150,545	$ (191,074)
	Uncompensated care pool assessment		$ 2,466,357		$ 2,779,285	$ (312,928)
	Provision for bad debts — net		$ 10,910,272		$ 10,078,529	$ 831,743
	Depreciation and amortization		$ 19,728,647		$ 20,681,479	$ (952,832)
	Interest		$ 3,449,624		$ 3,566,984	$ (117,360)
	Total expenses		$ 429,360,223		$ 430,204,340	$ (844,117)
	income from operations		$ 5,420,605		$ 5,365,125	$ 55,480
	Nonoperating gains (Losses) — net		$ 2,758,538		$ (2,831,889)	$ 5,590,427
excess (deficit) of revenue and gains over expenses		$ 8,179,143		$ 2,532,236	$ 5,646,907
	Other Changes in Unrestricted Net Assets:
	Net assets released from restrictions for purchase of property, plant, and equipment		$ 663,850		$ 394,342	$ 269,508
	Pension and post-retirement related adjustments		$ (16,327,805)		$ (3,326,153)	$ (13,001,652)
	Change in net unrealized gains and losses on investments		$ (5,162,339)		$ 7,277,676	$ (12,440,015)
	Other change —
total other changes in unrestricted net assets		$ (20,826,294)		$ 4,355,865	$ (25,182,159)
decrease in unrestricted net assets		$ 6,888,101	$ (19,535,252)

Proportion Allocation

Income Statement

Unrestricted Revenue and Other Support 2011 2010

Net patient service revenue $ 425,909,199 $ 425,552,477
Other revenue $ 7,589,311 $ 8,992,300
Net assets released from restrictions used for operations $ 1,282,318 $ 1,023,688
Total unrestricted revenue and other support $ 434,780,828 $ 435,568,465
Expenses: 2011 2010 Percentage
of total 2011 Percentage
of total 2010
Salaries and wages $ 196,304,042 $ 196,599,763
Physician salaries and fees $ 33,901,510 $ 35,021,804
Fringe benefits $ 47,640,300 $ 46,325,951
Supplies and contracted services $ 114,959,471 $ 115,150,545
Uncompensated care pool assessment $ 2,466,357 $ 2,779,285
Provision for bad debts — net $ 10,910,272 $ 10,078,529
Depreciation and amortization $ 19,728,647 $ 20,681,479
Interest $ 3,449,624 $ 3,566,984
Total expenses $ 429,360,223 $ 430,204,340
income from operations $ 5,420,605 $ 5,365,125
Nonoperating gains (Losses) — net $ 2,758,538 $ (2,831,889)

$ 8,179,143 $ 2,532,236

Other Changes in Unrestricted Net Assets:

Net assets released from restrictions for purchase of
property, plant, and equipment $ 663,850 $ 394,342
Pension and post-retirement related adjustments $ (16,327,805) $ (3,326,153)
Change in net unrealized gains and losses on investments $ (5,162,339) $ 7,277,676

Other change —

$ (20,826,294) $ 4,355,865

$ (12,647,151) $ 6,888,101

	Percentage of total 2011		Percentage of total 2010
excess (deficit) of revenue and gains over expenses [Net Income]
Total other changes in unrestricted net assets
Decrease in unrestricted net assets