HCA-240 Topic 2 Essay Variance Analysis

HCA-240 Topic 2 Essay Variance Analysis Variance Analysis Variance analyses are important interpretive tools for managed care health care facilities seeking to monitor and control their costs. Most managed care health care facilities operate with relatively small margins and because most of their cost is variable, changes in budgetary expectations can have a substantial influence on costs and therefore on profitability. When budgetary expectations have not been met, a detailed report should follow explaining the deficits and include plans and all solutions that will prevent negative reporting moving forward. In this essay, we will explain factors that should be considered when writing a detailed variance report, that will include the relationships between variance reporting, the interpretation of variance report results, and actual results of performance. The objective of management should be to reduce the efficiency cost in any given situation. Upon receiving monthly budget reports for the previous departments production month, the data concluded salaries were higher and supplies were lower than budgeted. When negative reporting has been established, a variance report should be written to the vice president of the company explaining factors that should be considered to prevent such negative reporting in the future and all possibilities to solve the issue. A variance report is a document that compares planned financial outcomes with the actual financial outcome. Particularly: a variance report compares what was supposed to happen with what actually happened. Ordinarily, variance reports are used to analyze the difference between budgets and actual performance. While achieving this objective, two major alternatives are accessible to management: the preventive approach and the detection–correction approach. “In the preventive approach, management attempts to minimize the efficiency cost by minimizing the probability that a problem will occur. The detection–correction approach seeks to minimize efficiency cost by minimizing the time that a problem remains uncorrected” (Cleverley, Song, Cleverley, 2011, p. 381). A decision to investigate given variances is not an automatic occurrence but only when negative reporting has occurred, which involve some financial commitment by the organization and thus should be weighed carefully against the expected benefits. Variance analysis is simply an examination of the deviation of an actual observation from a standard and an important management function to assist with managing a department budgetary expenses and salaries. Identifying such variances, will allow managers to recognize problems, identify root causes, and implement correction actions. In the case of salaries, the variance is unfavorable and more than projected. When studying the variance and trending overtime, we can see the root cause, such as the departmental overtime utilization for increase in volume or a higher paid rate for labor than was captured during the budget process. With the data that has been reported, managers can implement a corrective action plan to help alleviate the variance. Similar steps should be applied for the supply variance. By performing such variance analysis, favorable variances are identified. Reports will identify trending over time and demonstrate whether this is a contingent occurrence or if the savings are realized due to new contract negotiations with suppliers or process improvements. Once variances are identified, department managers can effectively identify the information effectively to make strategic decisions within the department moving forward. Variance analysis are utilized for comparative purposes, which are prior period values and actual budgeted values. In each case the objective of cost variance analysis is to explain why actual costs are different, either from budgeted values or from prior-period actual values. This objective is also an important element in the cost-control process of the department. Economical changes in healthcare can produce variations in volume, pricing, and efficiency, which ultimately will impact the department’s overall success. Variance analysis allows managers to measure how the department is performing in comparison to the projections made in the budget for a specific time period. Also, when actions are necessary to alter departmental performances, variance analysis provides a structure to measure departmental success. Regarding salaries and employing strategies, such as, eliminating overtime by using part-time employees to reduce salaries, which can be re-evaluated for improvements through the variance analysis process. When writing variance reports for my department, the vice president requires all possible solutions for improvement; which includes eliminating overtime by using part-time employees to reduce unfavorable salaries. Although the supplies were lower than budgeted, different solutions should be in place to maintain the favorable data. Providing recommendations related to improving the usefulness of a standard costing system by updating the variances in a costing system “the overemphasis placed on price and efficiency while excluding consideration for the quality of the materials and products manufactured. There have also been criticisms raised on the use of volume variances as a measure of utilization of capacity. This particular variance ignores any overproduction and inventory buildups. The one factor the critics fail to recognize is that variance analysis is not limited to one set of variables” (Cheatham, C. B. and Cheatham, R.L., 1996). By improving the standard costing system, a Raw Materials Ordering Variance will allow managers to see the effectiveness of their suppliers. “A variation in the results of this variance may be considered unfavorable because the goal is to match material orders delivered with the orders placed. Raw material buildups and production delays are result from unfavorable variations. The Price Variance is the traditional variance that has been criticized as relying heavily on price” (Roehm, H., Weinstein, A. L., and Castellano, J. F., 2000). Also, monitoring production levels and quality variances can incorporate all costs in the standard cost per unit. “All costs include both labor and overhead. By separating the quality factor from the traditional efficiency variance, managers can use the Quality Variance to analyze the quality of the goods manufactured. This is a critical improvement to any standard costing system” (Cheatham, C. B. and Cheatham, R.L., 1996). In conclusion, the fact remains that variance analyses are important interpretive tools for managed care health care facilities seeking to monitor and control their costs. The purpose of this essay was to explain what factors that should be considered when writing a variance report to the company’s vice president, all possibilities of solutions were included to prevent higher salaries than budgeted, and solutions to improve the costing system that includes the supplies even with favorable data reported. According to Cleverley, “the investigation of a variance is based on the cost of investigation, the probability that a correctable problem exists, the potential loss if the problem is not corrected, and the costs of problem correction. It may not always be possible to develop truly objective measures for these values, but sensitivity analysis may offer a useful aid in such situations” (Cleverley, Song, Cleverly, 2011, p. 395). References: Cleverley, W. O., Song, P. H., & Cleverley, J. O. (2011). Essentials of Health Care Finance (7th ed.). Cheatham, C. B. and L. R. Cheatham. 1996. Redesigning cost systems: Is standard costing obsolete? Accounting Horizons (December): 23-31. Roehm, H. A., L. Weinstein, and J. F. Castellano. 2000. Management control systems: How SPC enhances budgeting and standard costing. Management Accounting Quarterly (Fall): 34-40.