The variance analysis approach

The variance analysis approach

Healthcare institutions usually employ the concept of variance to analyze and explain the variation between budgeted and actual charges and costs. Variance analysis if emerging as a significant part of the executive health care workers set to improve efficiency and set priorities for improvement of the organization as part of a strategic plan. In hospital variance analysis, the size and level of the hospital, as well as the utilization of services, are significant. This paper outlines the application of cost data within a hospital in a bid to provide a comprehensive report to the vice president of the effectiveness of costs in improving organizational performance.

At every level and stage of decision-making, the application of cost data will be drawn from budgeting and variance assessment. The variance analysis incorporates two essential steps, including a description of a precise total cost model based on the definitional relationship and the decomposition of the difference or change between dual total costs into discrete variances. The variance analysis approach, the total cost is shared in the form of indirect and direct cost. The process of cost manufacturing adopted here equally functions like variable and fixed cost. The approach analyzes the costs related to production volume.

Cost analysis based on a pre-determined rate of operating gives standard costs. The method also offers approaches to using quantities for factor, labor, and material expense that are important factors for production. The use of this technique assigns cost founded on engineering specification and representation of highly efficient production for forecasts of future market trends and quality standards based on a fixed quantity of material, overhead, and labor for production approximation (Drury, 2014). Variance reports provide accurate hospital financial data covering both cost and budget. The strengths of the variance report provide managers with the ability to work towards planning and adjusting values to capture and correct any issue. The increases in the cost of hospital supplies, wages, salaries, and increase or decrease in volume of patients are some of the factors considered in providing a variance report for the vice president of the hospital.

A historical approach associated with budget variance provides an avenue for a hospital director to assign duties to managers of cost centers as well as make them accountable for the financial performance of their departments. To that end, variance evaluations would provide every departmental manager with the information to compare budgeted and actual costs figures. The department managers would calculate the budget variance by deducting actual costs from estimated costs (Drury, 2014). The positive outcome is beneficial, while negative numbers would be unfavorable, conspiring the deficits. The monthly budget results are comparable to planned financial expenses for the same period. As such, the projected objective planned for the month was unattainable. A good example would be the case where some physicians and support staff working overtime due to the increase of patients with traumas and injuries, and their salaries increased contrary to the budget plan for the month. The supply of hospital material for the month also increased, leading to a consequent increase in expenditure that was not in the initial financial plan. In this aspect, a variance report is vital in improving the productivity of the hospital, especially concerning added labor costs, equipment, and supplies.

Monthly variance reports for each department provide detailed information about the expenditure of the particular period. Correct preparation of the variance reports gives the management the ability to reflect on the deviations and assist in promoting effectiveness based on cost controls. XXX writes that the approach is essential in improving the efficiency of performance concerning well-analyzed variance reports. The vice president requires departmental managers to understand the process of appropriate interpretation of the results captured in the variance report in a bid to ensure improvements for future budgets. In cases where actual costs are higher than projected costs, the difference is termed as an unfavorable variance.

An essential factor that requires attention in the variance report is employee salaries. Employees benefit from monthly salaries, which may lead to the assumption among the management on the budget requirements. However, several risks arise with the hypothesis, such as hiring additional employees to assist a department and annual reviews. In this aspect, the manager will either spend money less than budgeted or exceed the amount for the month, depending on the circumstances. When formulating a variance report to the vice president, the manager will have to include the reasons behind under or over budget for the financial month (Hyett, Podosky, Santamaria & Ham, 2007). If the manager has several employees attaining their monthly review, they review an annual incentive alike. For instance, an increase from 3 percent to 7 percent would raise the expenditure related to the employees. To that effect, the manager would have to incorporate the reasons explaining a high variance amount on the specific month. Hiring employees for a department would warrant the permission of the vice president in a bid to adjust the budget. Once the vice president has approved the budget, the manager will be at liberty to hire more employees and ensure that they are rewarded according to the budgetary allocations.

The department manager can equally evaluate and equate financial performance on a monthly or basis by employing a variance report. The concept makes it easier to use the report in identifying any upcoming issues (Davis & Cleverley, 2016). In that order, a department manager may see any changes in health care performance, and the effects of additional expenditure align with the amount of budget. For instance, the hospital requires an endless supply of materials contrary to initial budget due to unexpected increase in patients, the vice president of the organization has the mandate of responding to the requirement from every hospital department and re-examine their budgetary allocations. The vice president of the organization is also answerable to the performance of every hospital department. According to Hyett, Podosky, Santamaria, and Ham (2017), vice president needs to officially accept the final financial plan, necessarily the cash budget and financial statements that are critical to assessing financial health. After completion of the variance report, it can be passed to the vice president who would gather and evaluate all results and formulate the subsequent action steps. The ensuing level of budgetary changes would reflect the findings and input of every department based on the report.

Conclusively, departmental managers have direct responsibility of providing accurate budgets needed to increase hospital’s revenues. Managers should understand the significance of variance reports to ensure the financial health of the organization. The value of variance reports in comparing budgeted costs and actual costs provides valuable information on the financial performance, identify any problems that may arise with expenses or budgeting, and help managers offer expertise input to offer solutions to financial hitches.