Consider the following 2011 data for Newark General Hospital (in millions of dollars):__________.
Static Flexible Actual
Budget Budget Results
Revenues $4.7 $4.8 $4.5
Costs 4.1 4.1 4.2
Profits 0.6 0.7 0.3
Calculate and interpret the profit variance.
=Actual profit-Static profit
=$0.3-$0.6
=-$0.3
There is an unfavorable profit variance which means that the company earned less that it prepared for.
Calculate and interpret the revenue variance.
=Actual revenues-Static Revenues
=$4.5-$4.7
=-$0.2
There is an unfavorable revenue variance, because the company sold less than it planned for.
Calculate and interpret the cost variance.
=Static Cost-Actual Cost
=4.1-4.2
=-$0.1
There is an unfavorable cost variance, this means that the company spent more than it planned for.
Calculate and interpret the volume and price variances on the revenue side.
Volume variance=Flexible Revenue-Static Revenue
=$4.8-$4.7=$0.1
Favorable because the company sold more units than it planned for.
Price variance=Actual Revenues-Flexible Revenues
=$4.5-$4.8=-$0.3
The answer is unfavorable because the company sold it products at a lower price than plan which might have actually resulted to the increase in actual volume sold.
Calculate and interpret the volume and management variances on the cost side.
Volume variance=Static cost –Actual Cost
=$4.1-$4.1=$0
Favorable which means that regardless of the fact that the company sold more units, the company produce the same number of units it plan for.
Management variance=Flexible Cost –Actual Costs
=$4.1-$4.2=$0.1
This is unfavorable which means maybe as a result of the higher units sold, the company had to spend more in servicing these units resulting to cost inefficiency for the period.
How are the variances calculated above related?
The above variances are associated, as the increase in volume, should increase the revenue and cost proportionality. However, it has not increased in the same portion. Therefore, there are unfavorable variances.

The profit variance is unfavorable because actual profit was lower than the budgeted profit. Whenever we have a static and a flexible budget, we must use the flexible budget to calculate the variances. Not only revenues were lower than expected, but also costs were higher than expected.

Calculate and interpret the revenue variance.

revenue variance = actual revenue - budgeted revenue = $4.5 - $4,8 = -$0.3 U

The revenue variance is unfavorable because revenue was lower than expected. This means that they either had less patients or charged less per patient.

Calculate and interpret the cost variance.

cost variance = actual costs - budgeted costs = $4.2 - $4,1 = $0.1 U

When we analyze costs variances, positive numbers represent unfavorable variances because actual costs were larger than budgeted. It is the opposite to what happens with revenue and profit variances.

In this case, actual costs were larger than expected, which means that the hospital spent more money than budgeted.

Calculate and interpret the volume and price variances on the revenue side.

volume variance = flexible revenue - static revenue = $4.8 - $4.7 = $0.1 F

the flexible budget shows higher numbers because the number of patients was higher than expected.

price variance = actual revenue - flexible revenue = $4.5 - $4.8 = -$0.3 U

even though the volume variance was favorable, more patients, the price charged was lower than expected because total revenue was lower than the flexible revenue.

Calculate and interpret the volume and management variances on the cost side.

volume variance (cost) = actual costs - budgeted costs = $4.2 - $4.1 = $0.1 U

When cost variances are positive, they are unfavorable because expenses were higher than expected. This means that the hospital spent more money than they had planned for carrying out the same amount of procedures.

management variance = actual costs - budgeted costs = $4.2 - $4.1 = $0.1 U

Since costs were higher than expected, this means that the hospital's management didn't perform properly. In this case, all variances show that management didn't work well. Revenues were lower than expected, costs were higher than expected and profits were lower. They should be glad that this is just a question, in real life they would be in serious problems for poor performance.

Explanation:

Static Flexible Actual

Budget Budget Results

Revenues $4.7 $4.8 $4.5

Costs $4.1 $4.1 $4.2

Profits $0.6 $0.7 $0.3