Introduction
Variance reporting in traditional hospital fixed
and flexible budgets seldom, if ever, provides both meaningful and
useful information upon which appropriate management decisions can
be based. Our approach to flexible budgeting is designed to
overcome this problem. The purpose of this presentation is to
illustrate this point.
Table of Exhibits for Example Department (#101):
Exhibit
1: Forecasted
(fixed budget) and actual
units of service
Exhibit 2: Typical
fixed budget variance report
Exhibit 3: Traditional
flexible budget variance report
Exhibit 4: eTBA
flexible budget
Exhibit 5: Efficiency
variance analysis
Exhibit 6: Monthly
variance report supplement
Exhibit 7: Monthly
labor review
Exhibit 8: Optimal
staffing comparative report
We
are assuming:
The goal is to analyze the November 1989 Variance Report for Example
Department (#101) at eTBA Regional Hospital; and
Forecasted (fixed budget) and actual units of service for Example
Department in November are as shown in Exhibit 1.
The remainder of the Appendix contains sample
reports and narrative contrasting variance reporting for Example Department
between the following:
Fixed Budget
Traditional Flexible Budget
eTBA Flexible Budget
Due to the significance of labor cost, and to
keep the comparison fairly simple, only the labor portion of variance
reporting is addressed in this presentation.
Fixed Budget
A typical fixed budget variance report for Example
Department appears in Exhibit 2.
A management analysis of this report would probably
first focus in on the Gross Margin, noting a $2,781 (9.09%) favorable
variance. Some managers would accept this as evidence of good
performance for the department and devote little, if any, attention
to the other details of the report. Others might take their
analysis a little further. For instance, they might compute
the gross margin percent and note that the actual percent (33.02%)
is greater than the budgeted percent (32.71%). This is obviously
favorable, and that might be the end of the analysis. Other
managers might suspect that with the increased volume, perhaps gross
margin should have been higher than was actually achieved. They would
then focus their analysis on the variance analysis portion of the
labor expenses. However, this becomes a very difficult task, even
for the manager with a solid finance background. Many different
variances are shown. The total labor variances indicate that the department
was quite efficient given the increased volume demands, but that the
actual hourly rate of pay was quite excessive. However, an experienced
accountant would know that such a conclusion is erroneous. The
Other Productive (overtime, agency, etc.) variance always is depicted
as a rate variance when there are no manhours or dollars budgeted
for that expense. In reality, this apparent $5,000 unfavorable
variance is probably primarily an efficiency and/or volume variance. However,
with this type of budget, there is no way to determine the exact nature
of the variance. An alternative around this problem, and one
utilized by many hospitals, is to combine all variable salary accounts
into one line item on the budget. This results in more accurate
variance analysis. But there is a major trade-off to this approach. Although
the nature of the variance may be appropriately categorized, it can
not be Isolated and attributed to the appropriate categories of expense
(e.g., by job code and differentiated between core staff and other
productive hours). In summary, variance analysis in connection
with a fixed budget is of limited use. In fact, many hospitals
with fixed budgets do not perform variance analysis.
Traditional flexible Budget
A traditional flexible budget variance report
for Example Department appears in Exhibit 3.
Note that, in comparison to the fixed budget in
Exhibit 2, there are no volume variances. The budget has been "flexed" to
reflect actual volume for the month. The budget to actual comparison
here shows an unfavorable variance of $706 for gross margin compared
to a favorable variance of $2,781 on the fixed budget. Even If the
fixed budget $2,161 volume variance is subtracted from the $2,781
total volume variance on the fixed budget, the resulting $620 gross
margin variance is still favorable. This further illustrates the problematic
nature of variance analysis with a fixed budget. As previously discussed,
part of the Other Productive salary variance of $5,000 in the fixed
budget is obviously a volume variance.
Analyzing labor variances in the traditional flexible
budget is every bit as difficult as it is in a fixed budget. Every
so-called variable labor account will invariably show a total variance.
This will also be the case in those instances where Other Productive
labor (overtime, agency, etc.) is not shown separately, but combined
with the applicable job codes. The vast majority of the variances
are really "false" variances. This will become more readily
apparent in the discussion of the eTBA Flexible Budget. In summary,
variance analysis with the traditional flexible budget is only marginally
better than that obtainable with a fixed budget. In both cases, false
and confusing messages are sent to management and resultant erroneous
conclusions are reached. They are tools used with much trepidation.
eTBA Flexible Budget
The major differences between the eTBA approach
to flexible budgeting and the traditional approach are:
The eTBA approach is based upon the relationship of weighted units
of service to each separate skill level in the department (RVUs by Job
code). This approach recognizes that changes in the mix of a department's
output has a varied impact on the different categories of employees within
the department. Traditional flexible budgets "flex" payroll either
on unweighted units of service or one overall total for weighted units
of service applied Indiscriminately to all skill levels. Thus, the
traditional approach has a built in logic error.
The eTBA approach to variance reporting of labor cost better distinguishes
between true variances and false variances. For Instance, core staff
regular payroll costs are not flexed (except in supplemental informational
reports). Flexing occurs only with respect to other productive hours
(overtime, agency, float, etc.). This feature reflects the reality of the
workplace, whereby core staff is essentially a fixed cost in the short-term
and increased workload demands are met with other productive hours. As
a result, false variances are nearly eliminated and the budget assumes
a far greater level of integrity.
Recognizing that prudent management should not be based upon a single
month's variance analysis, the eTBA approach incorporates variance trending
reports. These reports are useful supplements to monthly and year-to-date
variance reports, particularly with respect to core staffing decisions.
Exhibits 4 through 8 provide examples of eTBA
flexible budget variance reports for Example Department.
Contrast Exhibit 4 to Exhibit 3. For ease of comparison, the
total flexed labor dollars in both reports were kept identical. In
reality, there would be a difference, as explained under the first
bulleted point above. Note that Exhibit 4 is a much "cleaner" report. Variances
shown for core staff are only hourly rate variances. False efficiency
variances have been eliminated. Although there is still a sizeable
unfavorable efficiency variance for Other Productive labor, is not
the erroneous inflated variance depicted in Exhibit 3. Exhibit 4 tells
the reader that, during November, Example Department had some positive
and negative hourly rate variances and a fairly sizeable unfavorable
efficiency variance for Other Productive labor. Exhibit 5 shows the
composition of the efficiency variance.
Although Exhibit 4 Is much more useful than Exhibit
3, It doesn't tell the reader whether or not there Is sufficient core
staffing, or if the mix of skill levels is the most appropriate from
an efficiency standpoint. In addition, it is only a snapshot of one
month's operating results and not necessarily indicative of customary
performance or trends. Exhibits 6 through 8 help address these issues.
Exhibit 6 is a "what-lf supplement to the variance report depicted
in Exhibit 4. It is identical to Exhibit 4, except that core staff
has been flexed in response to the volume of activity for the month.
Note that the corresponding flexed Other Productive labor cost is
less than the amount shown in Exhibit 4. Exhibit 6 shows that, based
upon November's activity, there is need for one additional Tech II
(at $2,000 per month), and what the Other Productive labor cost should
be If staffed at that level. Note that the department would be expected
to be more efficient at that level of core staffing. Exhibit 6 is
depicted as a "what-lf report since it is based upon 20-20 hindsight.
It shows what costs should have been had the department
manager known in advance what the volume and mix of activity would
be, and had the department manager received authorization and been
able to hire one Tech II on or before the first day of the month.
That is why Exhibit 4,rather than Exhibit 6, is utilized as the primary variance report for the department manager. Typically, staffing level authorization is restricted to executive level management. Exhibit 6 seems to indicate a need for an additional Tech II in Example Department. However, the activity levels for November could have represented an anomaly. Decisions to add or delete core staff are usually based upon longer observed trends.
Thus, Exhibit 7 is useful in deciding
whether or not to authorize the hiring of an additional Tech II. Note
that November is the third consecutive month that the cost management
system has
indicated a need for one additional Tech II. Both
Exhibits 6 and 7 incorporate additional unique features of the eTBA
approach. First, the flexing of core staff is done on a step function
basis in increments appropriate for the applicable job code (e.g.,
full FTEs, half FTEs, etc.). Second, flexing of core staff Is
performed based upon deseasonalized volumes of activity. Flexing of
Other Productive labor hours is based upon actual activity (not deseasonalized).
These unique features are Incorporated to mirror the realities of
the Hospital's environment and to produce more meaningful information
for management use.
Exhibit 8 is an example of the integration of
productivity monitoring subsystems into the overall cost management
system. In this example it is assumed that an operations review of
Example Department Indicated that the skill mix in the department
could be changed by substituting seven Tech Is for seven Tech Us and
by eliminating one Supervisor position, resulting in reduced operating
costs. However, until these goals are reasonably attainable, they
are shown as reconciling differences between the budgeting and productivity
systems. Exhibits 4 through 8 are examples of reports that can
be generated with the eTBA approach to flexible budgeting. They are
by no means all-inclusive.