Summary HCA-240 Topic 2 Essay Variance Analysis

HCA-240 Topic 2 Essay Variance Analysis Variance Analysis Variance analyses are important interpretive tools for managed care health care facilities seeking to monitor and control their costs. Most managed care health care facilities operate with relatively small margins and because most of their cost is variable, changes in budgetary expectations can have a substantial influence on costs and therefore on profitability. When budgetary expectations have not been met, a detailed report should follow explaining the deficits and include plans and all solutions that will prevent negative reporting moving forward. In this essay, we will explain factors that should be considered when writing a detailed variance report, that will include the relationships between variance reporting, the interpretation of variance report results, and actual results of performance. The objective of management should be to reduce the efficiency cost in any given situation. Upon receiving monthly budget reports for the previous departments production month, the data concluded salaries were higher and supplies were lower than budgeted. When negative reporting has been established, a variance report should be written to the vice president of the company explaining factors that should be considered to prevent such negative reporting in the future and all possibilities to solve the issue. A variance report is a document that compares planned financial outcomes with the actual financial outcome. Particularly: a variance report compares what was supposed to happen with what actually happened. Ordinarily, variance reports are used to analyze the difference between budgets and actual performance. While achieving this objective, two major alternatives are accessible to management: the preventive approach and the detection–correction approach. “In the preventive approach, management attempts to minimize the efficiency cost by minimizing the probability that a problem will occur. The detection–correction approach seeks to minimize efficiency cost by minimizing the time that a problem remains uncorrected” (Cleverley, Song, Cleverley, 2011, p. 381). A decision to investigate given variances is not an automatic occurrence but only when negative reporting has occurred, which involve some financial commitment by the organization and thus should be weighed carefully against the expected benefits. Variance analysis is simply an examination of the deviation of an actual observation from a standard and an important management function to assist with managing a department budgetary expenses and salaries. Identifying such variances, will allow managers to recognize problems, identify root causes, and implement correction actions. In the case of salaries, the variance is unfavorable and more than projected. When studying the variance and trending overtime, we can see the root cause, such as the departmental overtime utilization for increase in volume or a higher paid rate for labor than was captured during the budget process. With the data that has been reported, managers can implement a corrective action plan to help alleviate the variance. Similar steps should be applied for the supply variance. By performing such variance analysis, favorable variances are identified. Reports will identify trending over time and demonstrate whether this is a contingent occurrence or if the savings are realized due to new contract negotiations with suppliers or process improvements. Once variances are identified, department managers can effectively identify the information effectively to make strategic decisions within the department moving forward.