A variable hospital department manager has numerous responsibilities throughout a fiscal year, including overseeing the hospital staff and policies, budgeting and protecting profits. They ensure that the needs of a community are met to the fullest, in terms of health. He or she is required to liaise with all other managers, including the financial manager, who guards against overspending and ensures increased profits for the hospital. A financial manager is therefore always involved in the hospital budgeting. The aforementioned department manager prepares reports that aim at analyzing how effective each department in the hospital is. They do this by comparing reports over a given period of time to determine any variances, thus the need for variance analysis.
Budgeting entirely relies on assumptions by the manager and in some cases; the expected figures and actual figures do not match, creating variations. Such variances are caused by several factors and a variance report is thus prepared (Drummond & Vowler, 2012). Notably, the report is aimed at explaining to business executives on what transpired throughout the fiscal year to warrant such differences. A comparison of figures helps them know how the hospital is performing.
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A situation may occasionally occur in the hospital where the payroll for employee salaries is higher than budgeted or the supplies lower than budgeted. In such a scenario, the budget manager is entitled to provide feedback on incomes, expenditures, finances and variations of budget costs. This scenario will be the basis of our variance analysis, where we will illustrate the relationships between interpretation of variance result reports, variance reporting and the actual performance results of the hospital. We shall also consider the factors that may lead to such variances.
In a case where many patients have been hospitalized, say due to an outbreak, the hospital management may approve overtime for the available health workers, which aims at attending to the needs of the increasing number of patients ( Ness, 2013). Working overtime notably attracts higher salaries for the health workers involved, which could not have been predicted in the budget report. Moreover, more supplies may be used in providing treatment and in-patient services. The supplies may also run out faster than expected. This will affect an entire budget, resulting in discrepancies.
The accuracy and reliability of the figures provided could also cause certain variations. Accounting errors in budget records or in an actual revenues and costs could result in variances, even where errors do not really exist. One may unknowingly key in wrong information, which could be way off the budgeted amount. For instance, a human or computer error could show increase in the payroll of salaries or decrease in hospital supplies, despite other factors being constant. The vice versa is also a possibility, where supplies indicate an increase while the salaries depict a decrease from the expected amount.
The probability of correction of a variance could also determine the variance report. In a case where the world market price of a certain raw material, say the metals uses to construct hospital beds, is higher than the budgeted amount, the result would be lower supplies (Drummond & Vowler, 2012). This would be so because the hospital management will have no control over the world market prices. If at all such a factor could be rectified and its cost is likely to be higher than the advantage of the action, then there would be no point in further attempt at correction.
Materiality is also another factor to consider. This basically means the volume of the variance which in turn reflects the degree of the problem and the likely profits that may be accrued from rectification of the variance. Interdependence of variances is also examined. For example, a positive raw material price variance that results from the purchase of a material of lower grade may cause negative or adverse labour efficiency. The overall result would be higher salaries since the material of lower grade is hard to work with, amounting to labour inefficiency. The higher salaries depend upon the type of raw material purchased, thus the aspect of interdependence.
Employee theft could also cause negative variances, in that the hospital supplies inventory may have an imbalance ( Ness, 2013). If the inputs do not match the outputs but it is not reflected in the balance sheet, it certainly may mean that some employees are stealing the supplies for personal gain. Likewise, basic wage rates may also differ over time. At the time of preparing a budget, the wage rates may have been at a certain level, which could change before the next budget is prepared. This could create positive or negative variances in the payroll for salaries.
In the case where patients have been admitted due to an outbreak, additional supplies and equipment may be needed to attend to the rising number of patients. Consequently, the suppliers reduced the costs of equipment as well as giving discounts. This was due to the high demand coming from the hospital. In turn, the hospital’s books of accounts show a price variance in the direct raw materials that is positive.
In the time of the outbreak, the hospital was understaffed and it was thus considered necessary to approve overtime for the available health workers. This resulted in increased salaries in the payroll. Notably, for the hospital, health workers translate to direct labour. In the books of accounts, there will be a negative variance in the records of direct labour, since the hospital management spent more money in the salaries section than it had planned to. The direct materials variances and direct labour rate variances are related (Drummond & Vowler, 2012). Ideally, a reconciliation report is usually prepared and it provides the management with a synopsis that bridges the gap between the expected performance and actual performance of the hospital. It highlights areas of outstanding success and those that need extra attention in order to take curative actions.
Theoretically, a positive variance shows the hospital expenditures are less than it had budgeted for, and this could indicate accrued profits. This indicates that the financial position of the hospital is well above average, which is a good trend. However, a negative variance then shows that the hospital expenditures are more than it had budgeted for, leading to losses, which in turn indicate that the financial position of the hospital is below average, which is not a good trend.
The actual result from the additional salaries to workers is that there will be adequate health workers, thereby enhancing efficiency in providing treatment to the admitted patients. The hospital ends up boosting its public image since the needs of the community are met satisfactorily.
Variance analysis refers to the quantitative investigation of the difference between actual performance and planned budget of an institution, and in this case the hospital (Drummond & Vowler, 2012). This analysis is used to maintain control over the hospital, and can be computed for both revenues and expenditures. It gives the financial position of the hospital as at a certain fiscal year, and it gauges its performance. The management is able to know it weaknesses for future improvements and its strengths in order to maintain and improve its performance.
References
Drummond, G. & Vowler, S. (2012). Analysis of Variance: variably complex. British Journal of Pharmacology, 166 (3), 801-805. http://dx.doi.org/10.1111/j.1476-5381.2012.01893.x
Ness, D. (2013). Healthcare: Serving the Patient. Healthcare, 1 (3-4), 58 http://dx.doi.org/10.1016/j.hjdsi.2013.07.009
