NR 630 Budget and variance calculation

NR 630 Budget and variance calculation 1. The salary budget is established by determining the number of full-time-equivalent (FTE) staff needed for the fiscal year. To prepare a salary budget, the first step is to figure out the volume of work for the coming year. 2. Workload: The amount of work performed by a unit/department is referred to as the workload. It can be measured in a variety of ways, such as the number of patient days, number of outpatient visits, and number of operations per day. Each cost center determines the measure that is most appropriate for its unit of service. 3. Units of service that will be provided the coming year. This is usually based on the past year’s number of units, plus a predicted incremental increase for the coming year, based on population increases and needs. 4. Hours-per-patient-day (HPPD) is the number of hours of nursing care delivered per patient. To calculate HPPD, the total-care-hours required for the year is divided by the number of patient days. Budgeting is based on a patient-classification system, which is the amount of resources used related to different levels or categories of patient acuity. For example, let’s say that a certain cardiac-observation unit is forecasting 12,500 patient-days for the coming year. Assume that this unit classifies these 12,500 patients into one of four categories: category one being fewest resources used or lowest acuity; and category four being most resources used or highest acuity patients. Assume that, for category one, the average-patient-care-hours equals 1.5 hours of nursing care provided to these patients during a 24-hour period; for category two, 5.0 care hours; for category three, 8.0 care hours; and, for category four, 12.0 hours of nursing care is provided to these patients during a 24-hour period. Calculating Hours Per-patient-day (HPPD) 1. Calculate the total-care-hours required for the year: # of Patient Days X Average Care Hours/24 Hours = Total Care Hours Cat 1 1,000 pts 1.5 = 1,500 Cat 2 2,500 pts 5.0 = 12,500 Cat 3 4,000 pts 8.0 = 32,000 Cat 4 5,000 pts 12.0 = 60,000 12,500 106,000 total-care-hours needed 2. Total-Care-Hours Required for the Year / Number of Patient Days 106,000 / 12,500 = 8.48 care hours Thus, for this cardiac observation unit, an average of 8.48 nursing-care hours are provided to patients per a 24-hour period. Once the manager has the workload forecasted, the next step is to determine the Staff requirements for the unit. Staff mix varies from hospital to hospital and may consist of RNs, LPNs, and aides. The manager needs to determine how many full-time equivalents (FTEs) will be required to provide patient care. One FTE is equivalent to 2,080 hours per year (40 hours per week times 52 weeks). A 0.9 FTE is equivalent to 36 hours per week; a 0.6 FTE is equal to 24 hours per week. If the manager calculated FTE requirements by dividing total-care-hours by 2,080 to determine the number of FTEs for the unit, this would underestimate the needed FTEs. This calculation would assume that all 2,080 paid hours were worked by the staff member. However, employees take vacation time, sick leave, and educational days—which are nonworked time, or nonproductive hours. Instead, we must relate to productive hours rather than paid hours. Data on nonproductive hours are generally provided by the institution’s payroll department and equal between 15–20% of paid hours. In our example, let’s say that productive hours equal 85% of the employee time worked, which would equal 1,768 productive hours. FTE Calculation Apply HPPD to Census and Determine Full-Time Equivalents (FTEs) a. Determine FTE requirements for number of expected patient -care hours: FORMULA: Total Care Hours /1,768 productive hours per FTE (1,768 = 85% of 2,080; 40 hours per week X 52 weeks per year = 2,080; less vacation, sick, education time) 106,000 / 1,768 = 59.95 FTEs = 60 FTEs Allocate the number of FTEs per position type and shifts. To calculate how many staff members will be working every day, first determine the number of care hours that are required per day. Staff Requirements 1. Calculate number of staff required per 24-hour period: 2. Divide total care hours by 365 days per year 106,000 / 365 = 290 hours of care per day Assuming employees work 12 hour shifts: 290 / 12 = 24.2 shifts per 24-hour period Let’s say in our example, 80% of the shifts are allocated to RNs and 20% to aides. Assume that 50% of the RN/aide shifts are for day shift (7a–7p) and 50% for the night shift (7p–7a). Staff Requirements Continued 3. b. Assign staff by type: 80% RN staff; 20% aides .80 X 24.2 = 19.4 RN shifts ? 20 RN shifts .20 X 24.2 = 4.8 aide shifts? 4 aide shifts 24.2 24 Assign staff by shift: Day Shift Night Shift Total 50% 50% RNs 9.7 ? 10 9.7 ? 10 19.4? 20 Aides 2.4 ? 2 2.4 ? 2 4.8 ? 4 24.2? 24 To establish staff positions, it is important to calculate the relationship between shifts per day and FTEs. This is the point where replacement is accounted for as well assuring that the unit is covered 24/7—the number of staff who are needed to the number of FTEs to be employed. Staff to FTE Convert Staff Positions to FTE Positions a. Calculate FTEs by type and shift: Divide total FTEs required by the 24.2 daily staff shifts 59.95 / 24.2 = 2.48 Each person-shift calls for employing 2.47 FTEs. An adequate number of FTEs are needed to provide coverage for the other 3–4 days out of the week, vacation, sick time, and education time. Multiply 2.47 by the staff type needed per shift. RNs days = 2.48 X 10 = 24.8 RNs nights = 2.48 X 10 = 24.8 (50 RNs) Aides days = 2.48 X 2 = 4.96 Aides nights = 2.48 X 2 = 4.96 (10 aides) 59.5 FTEs = 60FTEs Variances Variance analysis is the difference between the actual results and the planned results, or the amount by which the results vary from the budget. Variances are calculated for three reasons. One is to aid in preparing the budget for the coming year and future planning. The second reason is to aid in controlling results throughout the current year. By understanding why variances are occurring, actions can be taken to eliminate some of the unfavorable variances over the coming months. The third reason is to evaluate the performance of units or departments and their managers. At the end of a given time period, the organization compares actual results with the budget. Most organizations do this on a monthly basis. The simplest approach is to compare the total costs for the entire organization with the budgeted costs for the organization. For example, suppose a hospital incurred $5 million in expenses and was budgeted for $4 million in expenses for the year; the organization spent $1 million more than it had budgeted. The difference between the amount budgeted and the amount actually incurred is the total hospital variance. This variance is referred to as an unfavorable variance because the organization spent more than was budgeted. The volume variance is defined as the amount of variance caused simply by the fact that the patient volume has changed. For example, if the budget calls for 25,000 patient days, and there were actually 30,000 patient days, it would be expected that it would be necessary to spend more to care for the additional 5,000 patients. The additional cost of resources needed to care for the additional 5,000 patients constitutes the volume variance. The price variance is the portion of the total variance caused by spending more or less per unit—for some resources—than had been anticipated. For example, if the average wage rate for nurses is more per hour than was anticipated with the use of agency nurse or overtime, it would give rise to a price variance. Price variance could also be related to supplies. The purchasing department predicts all prices used for supplies; if there is a variance, this may be related to paying higher prices than anticipated for patient supplies. The third type of variance is the quantity variance. This portion of the overall variance for a particular line item that results from using more of a resource than was expected for a given workload. For example, if more supplies were used per patient day than expected, that would give rise to a quantity variance, because the quantity, or number, of supplies used per patient day exceeded expectations. Basically, this variance focuses on how much resources were used. If more nursing care resources were used per patient than was budgeted, this would translate into greater hours-per-care per patient. Flexible Budget Variance Suppose that during the month of May, the 2nd-floor critical-care unit (CCU) at Wagner Hospital incurs a total variance of $57,840U (unfavorable). The unit manager of the CCU is extremely concerned and wants to find out what caused the variance. To do so, the manager gathers the following information for the month of May: patient days (actual and forecasted), average pay rate for nurses, and the budgeted hours-per-patient-day. BPi = budgeted price—$33.00 per-hour budgeted nursing rate BQi = budgeted quantity—12.0 hours- per- care per patient BQo = 240 budgeted patient days APi = $42.00 per-hour actual nursing rate AQi = 14.0 actual hours-per-care per patient AQo = 260 actual patient days Suppose that the CCU had the following line item in their variance report for the month of May: Actual Budget Variance Nursing Labor $152,880 $95,040 $57,840 U 1. The first step for the manager is to calculate the original budget in terms of cost per patient day. In order to calculate cost per patient day, the manager multiplies the budgeted price by budgeted quantity: $33.00 X 12.0 = $396 per patient day. For the month of May, 240 patient days are expected, and the budget is: $396 X 240 = $95,040. Original Budget BPi X BQi X BQo $33 X 12.0 X 240 $95,040 2. The next step for the manager is to find the change in volume of the flexible budget. This is the amount the manager would have expected to spend if the actual number of patient days would have been known. The only change at this point is from BQo of 240 patient days to the new AQo of 260 actual patient days. The manager calculates the flexible budget as follows. Flexible Budget BPi X BQi X AQo $33 X 12.0 X 260 $102,960 Then, the manager compares the original budgeted amount to the flexible budgeted amount to determine the volume variance. Flexible Budget Original Budget BPi X BQi X AQo BPi X BQi X BQo $33 X 12.0 X 260 $33 X 12.0 X 240 $102,960 $95,040 Volume Variance $7,920 U The difference between the original budget and the flexible budget is caused by a difference in the number of patient days. The volume variance is 7,920 U. Since patient days are higher than expected, cost will be higher than expected. However, the manager notes that $49,920 of the variance still remains to be unaccounted for. 3. At this point, the manager compares the flexible budget to the actual budget in order to find the flexible-budget variance. The actual hours-per care, the actual average-price paid-per=nurse, and the actual number- of-patient-days are used. Actual Budget Flexible Budget APi X AQi X AQo BPi X BQi X AQo $42 X 14.0 X 260 $33 X 12.0 X 260 $152,880 $102,960 Flexible Budget Variance $49,920 U 4. The manager is simply breaking down the total variance into parts. Next, the manager combines the volume variance with the flexible-budget variance to determine the total variance. Actual Budget Flexible Budget Original Budget APi X AQi X AQo BPi X BQi X AQo BPi X BQi X BQo $42 X 14.0 X 260 $33 X 12.0 X 260 $33 X 12.0 X 240 $152,880 $102,960 $95,04 Flexible Budget Volume Variance Variance $49,920 U $7,920 U Total Variance $57,840 U At this point, the total variance has been broken down into a flexible-budget variance and volume variance. The flexible-budget variance is of greater concern to the nurse manager. The volume variance is from changes in patient days and is usually outside of the manager’s control. 5. In order to find out what is causing the greatest variance in the flexible budget, the manager separates the budget into two pieces: the price variance (average nursing rate per hour) and the quantity variance (hours per care). First, the manager determined if any part of the variance in the flexible budget was caused by differences in the quantity—or, nursing-care hours. In other words, did the added patient days have an effect on the quantity of nursing time per patient? To do this, a new budget category is created, called the subcategory. The subcategory is compared to the flexible budget—which equals the difference between actual patient-care hours compared to the patient-care hours that were budgeted. The AQo is the actual volume for both categories. The BQi is the budgeted price-per-hour-of-nursing- time. The only difference between the two categories is the AQi, or the patient-care hours. Subcategory Flexible Budget BPi X AQi X AQo BPi X BQi X AQo $33 X 14.0 X 260 $33 X 12.0 X 260 $120,120 $102,960 Quantity Variance $17,160 The quantity variance, or hours per care, was related to the patient population being more acuity ill, thus requiring more patient-care hours, and usage of agency personnel who were not as efficient in caring for patients due to their unfamiliarity with the institution. Second, the manager determines if some part of the flexible-budget variance was caused by differences in nursing-rate per hour. The Qi, or quantity (patient-care hours), is the actual value for both. The Qo, or the volume, is the actual value for both. The price is the only difference. Thus, to calculate the price variance, compare the subcategory to the actual budget—this is the difference between the average hourly rate paid to nurses versus the average hourly rate budgeted. Actual Budget Subcategory APi X AQi X AQo BPi X AQi X AQo $42 X 14.0 X 260 $33 X 14.0 X 260 $152,880 $120,120 Price Variance $32,760 The price variance of $32,760 results from the fact that, on average, $42 was paid per hour for nursing time instead of the budgeted $33. This was due to an excessive amount of overtime and use of agency nurses due to a greater workload of patients and a nursing shortage (i.e., several senior nurses retired, several nurses changed units/hospitals/careers due to burn-out, and hospital has a policy to hire only seasoned critical-care nurses to work in their CCU). 6. Finally, the manager incorporates the price and quantity variance together to note how they compromise the flexible-budget variance: Actual Budget Subcategory Flexible Budget APi X AQi X AQo BPi X AQi X AQo BPi X BQi X AQo $42 X 14.0 X 260 $33 X 14.0 X 260 $33 X 12.0 X 260 $152,880 - $120,120 - $102,960 Price Variance Quantity Variance $32,760 $17,160 Flexible Budget Variance $49,920 In conclusion, it can be determined that the total variance was caused by only a slight increase in patient volume, yet a higher acuity of patients—causing a greater usage of overtime and agency nurse utilization resulting in a higher average rate paid to nurses. Actual Subcategory Flexible Budget Original Budget APi X AQi X AQo BPi X AQi X AQo BPi X BQi X AQo BPi X BQi X BQo $42 X 14.0 X 260 $33 X 14.0 X 260 $33 X 12.0 X 260 $33 X 12.0 X 240 $152,880 $120,120 $102,960 $95,040 Price Variance Quantity Variance $32,760 $17,160 Flexible Budget Variance Volume Variance $49,920 $7,920 Total Variance $57,840 FTE Practice FTE Calculations