Budget Control and Cost-Revenue Management, Explained

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Budget Control and Cost-Revenue Management

Healthcare Organization and Management · Chapter 11: Financial Planning and Resource Management in HealthcareSection 11.2 · lesson 65 of 10510 min · free with a free account

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In this lesson

Using flexible budgets and variance analysis to explain healthcare overspending.

  • Explain why comparing actual costs with a static budget misleads when volume changes
  • Calculate a flexible budget and split a labor variance into volume, rate, and efficiency parts
  • Distinguish paid, worked, and productive hours, and supply price from usage variances
  • Write a variance explanation that states the cause, whether it will recur, and the action

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Transcript

Everything said in the video, section by section (1,358 words). Read along, or search it.

Opening Case

The Biggest Unfavorable Variance in the Hospital

Jamal Carter manages Larkfield's emergency department, including its fast-track area for minor injuries. This month's report shows fast-track salaries $46,330 over budget, the biggest unfavorable variance in the hospital. He's asked to explain it at the divisional review. Is he overspending? Or is the report comparing against the wrong thing?

Control Cycle

Why the Original Budget Misleads

Budget control is the general control cycle applied to money. Set a standard, measure performance, compare, and act on the difference. In most settings the standard holds still. A budget's standard doesn't. It was built on a volume assumption. When actual volume differs, comparing against the original budget gives a number that's arithmetically right, and analytically worthless.

Definition

Favorable and Unfavorable Are Not Verdicts

A variance is the difference between a budgeted amount and an actual one. It's favorable when expense comes in below budget, or revenue above it. Unfavorable is the reverse. Those labels are arithmetic, not verdicts. A unit that underspent because it couldn't fill its shifts reports a favorable variance, and has a serious problem. A unit that overspent because it treated twenty percent more patients reports an unfavorable one, and may have done very well.

Flexible Budget

Recalculating the Budget at Actual Volume

The fix is a flexible budget: the budget recalculated at the volume that actually happened, using the original standard cost per unit. Jamal's plan was a thousand visits, at a standard of four staff hours per visit and fifty dollars an hour. That's the static budget, two hundred thousand dollars. Actual volume was eleven hundred fifty visits. At the same standards, eleven fifty times four times fifty is two hundred thirty thousand. So about two thirds of the gap is simply the cost of doing more work. Only sixteen thousand, three hundred thirty dollars needs explaining.

Volume Variance

The Cost of Doing More Work

Now split the variance into parts with different causes. First, the volume variance: flexible budget minus static budget. Two hundred thirty thousand minus two hundred thousand is thirty thousand dollars, unfavorable. That's not a cost-control failure. If revenue rose with the extra visits, it may pay for itself. To split the rest, we need the standard hours for the work actually done: eleven fifty visits times four hours is forty-six hundred hours.

Rate and Efficiency

Two More Parts Complete the Gap

Second, the rate variance, which is the price variance for supplies. It's the actual rate minus the standard rate, times the actual hours. Fifty-one dollars minus fifty, times his actual forty-eight thirty hours, is four thousand eight hundred thirty dollars, unfavorable. Third, the efficiency variance, which is the usage variance for supplies. Actual hours minus standard hours, times the standard rate. Forty-eight thirty minus forty-six hundred is two thirty hours. Times fifty dollars, that's eleven thousand five hundred, unfavorable. Add the three: thirty thousand, plus eleven five hundred, plus forty-eight thirty. That's forty-six thousand, three hundred thirty, the whole gap.

Interpretation

Each Variance Points Somewhere Different

Each part points somewhere different. Volume: check whether revenue moved with activity. If the volume will last, re-forecast instead of cutting cost. Rate: work on what drives it. Typical causes are a richer skill mix than planned, overtime premium, or agency cover. Efficiency: more hours per visit than standard. First check that the standard still fits today's case mix. Only then have a productivity conversation.

Labor Hours

Paid, Worked, and Productive Hours

Labor variances often come down to which hours are being counted. Paid hours are every hour staff are paid for, including vacation, sick time and training. Worked hours are hours actually on duty. Productive hours are worked hours spent on the department's core work, excluding meetings and training on shift. Standards usually use worked hours, while payroll reports paid hours. Mix them, and a department looks over standard for reasons unrelated to performance. A unit with a long-term absence shows high paid hours and unchanged worked hours. That's a cost pressure in the absence line, not a productivity problem.

Quick Check

Finding the Biggest Imaging Variance

Your turn, with new numbers. The imaging department planned eight hundred scans, at three staff hours per scan and forty dollars an hour. It actually did seven hundred sixty scans, using twenty-three seventy hours at forty-two dollars an hour. Of the three parts, which is the biggest unfavorable one: volume, efficiency, or rate? Pause, and work it out. Rate is the biggest unfavorable part. Two dollars over standard, times twenty-three seventy hours, is four thousand seven hundred forty dollars. Efficiency is tempting. The standard hours are seven sixty times three, or twenty-two eighty. Ninety extra hours at forty dollars is only thirty-six hundred. And volume is favorable: the flexible budget, ninety-one thousand two hundred, is forty-eight hundred below the static budget.

Supply Variances

Price Versus Usage for Supplies

Supplies split the same way, with different names. The price variance comes from paying a different unit price than standard: contract terms, off-contract buying, substitutions. The usage variance comes from using a different quantity per case: clinical practice, waste, expired stock, or a heavier case mix. The remedies sit with different people. Price is fixed by procurement, and by managers who stop off-contract buying. Usage is fixed by talking with clinicians about practice. Tell a department only that supplies are over budget, and it reaches for its one lever, buying less. That fixes just one of the two causes.

Materiality

When a Variance Deserves a Chase

Not every variance deserves a chase. A materiality threshold is the level below which a variance isn't investigated, set as a percentage of the line, a dollar amount, or both. Attention is scarce, and small variances often come from timing and coding effects that reverse on their own. Two exceptions keep the rule honest. A small variance that recurs in the same direction every month is material: it's systematic, and it compounds. And any variance on a line that should be zero deserves a question, whatever its size.

Explaining Variances

Cause, Recurrence, and Action

A variance isn't explained until three things are said: what caused it, whether it will recur, and what's being done. 'Volume was above plan' just restates the arithmetic. It isn't a cause. 'Agency cover for two vacancies at premium rates. Both posts now offered. Expected to resolve next month.' That's an explanation, because it can be tested next month. Recurrence is the question most often skipped, and the one finance needs most. A one-off affects a month. A recurring variance changes the full-year forecast.

Matching Fixes

A Deferral Is Not a Saving

The fix must match the part. Volume calls for a check that revenue moved too, and a re-forecast if it lasts. Rate calls for work on recruitment, skill mix and overtime approval. Efficiency calls first for a check of the standard. Beware fixes that close this month's gap and cost more later: deferring maintenance, freezing needed hiring, canceling training, staffing below safe levels. Each produces a favorable variance and a liability. The tell: the saving comes from not doing something, rather than doing something differently.

Quick Check

Extra Nursing Hours on 4 North

One more case. 4 North planned five hundred patients, at five nursing hours each and forty-five dollars an hour. It saw five hundred patients and paid twenty-seven fifty hours, at forty-five dollars an hour. It began taking post-surgical patients this quarter. Which variance is this, and what comes first? Pause, and decide. It's an efficiency variance: patients and rate match the plan, but hours run two hundred fifty over plan. The first step is to check the standard, not to push nurses harder. A heavier case mix needs a new standard. Rate is tempting, since the cost per patient rose. But the price of an hour didn't change; the number of hours did.

Case Resolved

Jamal Brings the Decomposition

Back to Jamal. He walks into the review with the decomposition, not a defense. Thirty thousand of the forty-six is volume: a nearby urgent care closed, and his fast track absorbed its patients. Eleven five hundred is efficiency: two new hires were still learning the routine. Forty-eight thirty is rate: weekend overtime. He brings what every monthly review needs: the flexible comparison, the parts, causes with recurrence answered, the full-year effect, and actions with dates. And he asks the question the report can't answer: did net revenue come with the extra visits, and will the volume last?

Key Takeaways

Variance Analysis in Five Rules

To recap. Compare against a flexible budget, not the static one. Split the gap into volume, rate, and efficiency, because each has its own cause and fix. Know whether you're counting paid, worked, or productive hours. Explain each variance with its cause, whether it will recur, and the action. And never mistake a deferral for a saving.

About Healthcare Organization and Management at UPI Study

Healthcare Organization and Management (Health 302) is a self-paced online course of 105 video lessons in 18 chapters, from health systems and the law to ethics, leadership, teams, strategy, informatics, finance, quality, human resources, marketing and evidence-based practice. It carries a NCCRS credit recommendation for 3 semester credits.

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Why students take Healthcare Organization and Management with UPI Study

How hospitals and clinics are runHealthcare Organization and Management covers how care organizations are led and run: health law and ethics, leadership and teams, strategic planning, health informatics, budgets, quality improvement, staffing and marketing. It is a core course in healthcare administration and health management degrees.
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130,000+students helped with college creditsACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities.

Where the credit goes

Universities that work with NCCRS

Healthcare Organization and Management carries a NCCRS credit recommendation. These universities work with NCCRS; some are UPI Study's signed partners. ACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities.

Thomas Edison State UniversityThomas Edison State UniversitySigned partnerUniversity of the PeopleUniversity of the PeopleSigned partnerCharter Oak State CollegeCharter Oak State CollegeSigned partnerStrayer UniversityStrayer UniversitySigned partnerColumbia Southern UniversityColumbia Southern UniversitySigned partnerIndiana TechIndiana TechSigned partnerPenn StatePenn StateWorks with NCCRSSouthern New Hampshire UniversitySouthern New Hampshire UniversityWorks with NCCRSSUNYSUNYWorks with NCCRS +many more cooperating universitiesFind my college →

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FAQ

Questions students ask us

About Budget Control and Cost-Revenue Management

What is a flexible budget in healthcare?
A flexible budget is the original budget recalculated at the volume that actually happened, using the same standard cost per unit. If a plan of 1,000 visits at four staff hours per visit and $50 an hour costs $200,000, then 1,150 actual visits give a flexible budget of $230,000. Comparing actual spending with that figure separates the cost of extra work from real overspending.
How do you split a labor cost variance into volume, rate, and efficiency variances?
The volume variance is the flexible budget minus the static budget. The rate variance is the actual hourly rate minus the standard rate, times actual hours. The efficiency variance is actual hours minus the standard hours for the work done, times the standard rate. The three parts add up to the whole gap, and each points to a different cause, such as overtime premium or a changed case mix.
What is the difference between paid hours, worked hours, and productive hours in healthcare staffing?
Paid hours are every hour staff are paid for, including vacation, sick time, and training. Worked hours are hours actually on duty. Productive hours are worked hours spent on the department's core work, excluding meetings and training on shift. Labor standards usually use worked hours while payroll reports paid hours, so mixing them can make a department look over standard for reasons unrelated to performance.
What is a materiality threshold in budget variance analysis?
A materiality threshold is the level below which a variance is not investigated, set as a percentage of the line, a dollar amount, or both. It protects scarce attention, since small variances often come from timing or coding effects that reverse. Two exceptions apply: a small variance that recurs in the same direction every month is material, and any variance on a line that should be zero deserves a question.

About the Healthcare Organization and Management course

How many college credits is Healthcare Organization and Management?
Healthcare Organization and Management (Health 302) carries a NCCRS credit recommendation for 3 semester credits. ACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities.
How much does Healthcare Organization and Management cost and what is included?
$250, paid once, with lifetime access: all 105 video lessons, a practice quiz after each, the graded work and final exam, and an official transcript when you finish. Students who want several courses choose UPI Study PRO instead.
Which universities accept UPI Study credits?
UPI Study has signed partner agreements with universities such as Thomas Edison State University, University of the People and Charter Oak State College, and works with universities such as Penn State, SNHU and SUNY. ACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities. Use "Find my college" on this page to check yours.
How long does Healthcare Organization and Management take?
It is self-paced with no deadlines. The 105 lessons total about 17 hours of video; most students add reading and practice time and finish in a few weeks to a few months, on their own schedule.
How are the exams done?
Quizzes and assignments are online in the course. The final exam is taken online with proctoring; a person on the UPI Study team checks assignments, usually within two days.
How do my credits reach my college?
When the course shows 100% complete, request the official transcript from your dashboard. It is sent to the college you name, and you can send it to more than one. Check your college first with "Find my college" on this page, or ask Athena.

Ready for the full course? Earn 3 credits in Healthcare Organization and Management.

105 video lessons, a quiz after each one, and the graded work that earns the credit. Recommended for credit by NCCRS.

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