Maria Delgado, the Director of Finance of El Conejo Family Planning Clinic, recently had received a memorandum from the Chairman of the Finance Committee of the Clinic’s Board of Trustees. The memorandum also had been sent to all department heads, and had expressed concern that the results of the year’s operations were considerably worse than budgeted. One reason for this problem was that third parties had lowered their rate for one of the Clinic’s most significant visit types, but there appeared to be some other explanations as well. Ms. Delgado had been asked to analyze the reasons for the poor performance, meet with the relevant department heads, and make a presentation at the next board meeting concerning the Clinic’s performance.
In reviewing the budgeted and actual results, Ms. Delgado discovered that almost all of the Clinic’s variation from its budget could be attributed to four visit types and four services. For reasons of simplicity, she decided to base her presentation on these only.
Exhibit 1 contains the original budget for these four visit types: IUD, first visit; oral contraceptive, first visit; special follow-up visits (when problems existed with the contraceptive or contraceptive method); and routine follow-up. It also shows the budgeted variable expenses per visit for the four services: physician care, nursing care, medical supplies, and laboratory tests.
As Exhibit 1 indicates, the Clinic was paid on a per-visit basis. Its anticipated revenue for each visit type is shown in Exhibit 1, as is the anticipated utilization of services and the variable expense per unit for each service for each visit type. Using these estimates, the total variable expense per visit for each visit type was calculated. The revenue and total variable expense per visit were then multiplied by the anticipated number of visits to give total revenue and total variable expenses by visit type. The latter was deducted from total revenue to give the contribution to fixed expenses from each visit type. The fixed expenses were then deducted from the total contribution to give a total budgeted surplus of $85,000 for the accounting period.
Ms. Delgado asked her staff assistant, Asher Hawkins, to use the actual data for the period, shown in Exhibit 2, as the basis for a report on results for the year. This report was to contain a complete breakdown of the reasons why the Clinic’s actual surplus diverged from the budgeted one. The report would be submitted to the Clinic’s chief executive officer, and would be used by Ms. Delgado for her presentation to the Board of Trustees.
Mr. Hawkins began by using the data from Exhibit 2 to compute the actual financial results for the period (Exhibit 3), which showed that, instead of earning a surplus, the Clinic actually had incurred a deficit of $218,300. Then, reasoning that the Clinic had essentially no control over the number or type of visits seen, he also prepared a flexible budget (Exhibit 4), which showed that $750 of the difference was due exclusively to the change in the number of visits seen in the Clinic. Using similar reasoning, he prepared an analysis of the variance due to the changes in the third-party reimbursement rates (shown at the bottom of Exhibit 4), which showed that $17,000 of the difference was a result of these rate changes. . . .
- Be sure you understand how Exhibits 3 and 4 were prepared. Do you agree with Mr. Hawkins’ analyses so far?
- Besides changes in the number of visits and the reimbursement rate per visit, what are the other reasons why actual results might have diverged from budget?
- Calculate the variance associated with each of the reasons you gave in Question 2. How, if at all, might this information be used in managing the Clinic? How might it be used by the Clinic’s administration? By the Chief of Medical Staff? By the Director of Nursing?
- What information concerning visits, costs, and revenues would you suggest the Chief of Medical Staff and the Director of Nursing see on a regular basis? Why?