Question

6.3 Refer to Carroll Clinic s 2016 operating budget contam ed mexn101 62. Instead of the actual results reported in exh b 63. assume the following results: I. Volume (Number of Visits) Payer A Payer B 11,000 12,000 23,000 Total II. Reimbursement (per Visit) Payer A Payer B $ 95 III. Costs Variable costs: Supplies 350,000o Fixed costs: Labor $1,000,o0o 00,000 $1.500,o00 Overhead Total IV. P&L Statement Revenues: Payer A Payer B $1,045,000 1,140,000 $2,185,000 $350,00o 1,500,000 $1,850,000 $ 335,000 Total revenues Variable costs Fixed costs Total Profit

6.3 Refer to Carroll Clinic’s 2016 operating budget, contained in exhibit 6.2. Instead of the actual results reported in exhibit 6.3, assume the following results:

1. What are the profit, revenue, and cost variance based on the simple budget?
2. Construct Carroll’s flexible budget for 2016.
3. What are the profit, revenue, and cost variances based on the flexible budget?
4. Interpret your results. In particular focus on the differences between the variance analysis here and the Carroll Clinic illustration presented in the chapter.

Answer 1

Part (a)

All financials below are in $.

Please see the table below. Please note the row where symbols have been used to explain how a particular column has been calculated.

The profit, revenue, and cost variance based on the simple budget had been shown below in the last part of the table.

But we need to go through the working right from the beginning to understand the final results.

				Variance
		Simple Budget	Actual Results	$ or visit	%
		P	Q	Q - P	(Q - P) / P
I. Volume (Number of visits)
	Player A	9,000	11,000	2,000	22.2%
	Player B	12,000	12,000	-	0.0%
	Total	21,000	23,000	2,000	9.5%
II. Reimbursements (per visit)
	Player A	100	95	(5)	-5.0%
	Palyer B	90	95	5	5.6%
III. Costs
	Variable costs
	Supplies	315,000	350,000	35,000	11.1%
	Fixed costs
	Labor	1,035,000	1,000,000	(35,000)	-3.4%
	Overhead	500,000	500,000	-	0.0%
	Total	1,535,000	1,500,000	(35,000)	-2.3%
IV. Forecasted P&L Statement
	Revenues
	Player A	900,000	1,045,000	145,000	16.1%
	Player B	1,080,000	1,140,000	60,000	5.6%
	Total revenues	1,980,000	2,185,000	205,000	10.4%
	Variable costs	315,000	350,000	35,000	11.1%
	Fixed costs	1,535,000	1,500,000	(35,000)	-2.3%
	Total costs	1,850,000	1,850,000	-	0.0%
	Profits	130,000	335,000	205,000	157.7%

Part (b)

A flexible budget has been constructed and presented below. Please pay attention to the last column titled "How items in flexible budget has been derived?". This will help you understand how each item in the flexible budget has been obtained.

		Simple Budget	Flexible Budget	How items in flexible budget has been derived?
I. Volume (Number of visits)
	Player A	9,000	11,000	Same as actual
	Player B	12,000	12,000	Same as actual
	Total	21,000	23,000
II. Reimbursements (per visit)
	Player A	100	100	Same as simple budget
	Player B	90	90	Same as simple budget
III. Costs
	Variable costs
	Supplies	315,000	345,000	Figure for simple budget changed in proportion of volume; = 315,000 / 21,000 x 23,000
	Fixed costs
	Labor	1,035,000	1,035,000	Same as simple budget
	Overhead	500,000	500,000	Same as simple budget
	Total	1,535,000	1,535,000	Variable cost + fixed cost
IV. Forecasted P&L Statement
	Revenues
	Player A	900,000	1,100,000	Volume x reimbursement of player A
	Player B	1,080,000	1,080,000	Volume x reimbursement of player A
	Total revenues	1,980,000	2,180,000	Sum of above two items
	Variable costs	315,000	345,000	Calculated above
	Fixed costs	1,535,000	1,535,000	Calculated above
	Total costs	1,850,000	1,880,000	Variable cost + fixed cost
	Profits	130,000	300,000	Total Revenues - Total Costs

Part (c)

Variance w.r.t flexible budget.

				Variance
		Flexible Budget	Actual Results	$ or visit	%
		P	Q	Q - P	(Q - P) / P
I. Volume(Number of visits)
	Player A	11,000	11,000	-	0.0%
	Palyer B	12,000	12,000	-	0.0%
	Total	23,000	23,000	-	0.0%
II. Reimbursements (per visit)
	Player A	100	95	(5)	-5.0%
	Palyer B	90	95	5	5.6%
III. Costs
	Variable costs
	Supplies	345,000	350,000	5,000	1.4%
	Fixed costs
	Labor	1,035,000	1,000,000	(35,000)	-3.4%
	Overhead	500,000	500,000	-	0.0%
	Total	1,535,000	1,500,000	(35,000)	-2.3%
IV. Forecasted P&L Statement
	Revenues
	Player A	1,100,000	1,045,000	(55,000)	-5.0%
	Player B	1,080,000	1,140,000	60,000	5.6%
	Total revenues	2,180,000	2,185,000	5,000	0.2%
	Variable costs	345,000	350,000	5,000	1.4%
	Fixed costs	1,535,000	1,500,000	(35,000)	-2.3%
	Total costs	1,880,000	1,850,000	(30,000)	-1.6%
	Profits	300,000	335,000	35,000	11.7%

Part (d)

Interpret your results:

1. Reimbursement variance and therefore the revenue variance is unfavorable in case of Player A while they are favorable for B. Overall, revenue shows a favorable variance of $ 5000
2. Variable cost, that is supplies has unfavorable variance. The cost is higher than the budget.
3. Fixed costs show a favorable variance on account of labor costs. Actual performance had been $ 35,000 lower than budgeted.
4. Overall profit show a favorable variance of $ 35,000. Favorable variance of revenues were sett off in full by the unfavorable variance in the variable cost of equal quantum.

In particular focus on the differences between the variance analysis here and the Carroll Clinic illustration presented in the chapter.

We will not be able to answer this sub part unless you provide us the "Carroll Clinic illustration presented in the chapter". But I am sure, you will be able to answer this part yourself based on what we have done so far in this case.