Variance report analysis and applications

¶ … hourly rate for nursing was £12. The actual average rate was £15.95. This represents a variance of 32.917%. For the number of hours, the variance was 9.474%. For the total cost of nursing the variance was 45.526%.

The spending variance for the supplies/other variables category was 7.053%. The budgeted rate of efficiency for supplies was £10 per nursing hour. The actual was £9.77 per nursing hour, a variance of -2.21%. This can also be equated in terms of output. The budgeted rate of supplies per patient served was £5. The actual rate was £5.085, a variance of 1.7%.

In this memo, I will attempt to explain the cause of the variances, and recommend solutions to eliminate not only the variances but the overspending. Last year, the emergency room ran into serious cost overruns. Some of the additional costs were attributable to a higher patient volume, but most were not. When we examine the efficiency measures, we can see that the emergency room lost control of costs. For example, nursing costs were 45.5% higher than expected, despite patient visits being only 5.2% higher than expected. The overrun on nursing costs comes from two sources - nursing hours and nursing wages. The hours overran 9.4%, but the price went over by 32.9%. If these costs were controlled, they should only have risen in line with the increase in demand.

I would recommend that the following steps be taken to eliminate these variances and control costs. The most significant problem is that of the price of nursing. We have a target of £12 per hour for nurses, yet the pay rates vary between £7 and £28. We originally schedule with the £12 target in mind, but two things compromise this. One is overtime, which results from a greater patient volume than expected and the other is the use of older nurses. To address this issue, I recommend the emergency room examine variance information regarding patient visits for the past several years, and extrapolate an expected variance. Scheduling should then be conducted with the expected variance in mind, rather than simply the budgeted variance.

Another recommendation is to build more flexibility into the scheduling by keeping more nurses on part-time, and utilizing more younger nurses that command rates below the £12 average. Currently, we are meeting excess demand with nurses on overtime - we should be meeting that demand with increased hours to part-timers. Moreover, we are filling extra hours with more experienced nurses who cost more. We should use cheaper nurses to meet excess demand.

Supplies costs had a higher variance level than did patients. Currently, we tie our estimation of supply costs to nursing hours. Based on that comparison, we outperformed our budget because of the increased nursing efficiency we experienced. However, our main output is the number of patients served. If we evaluate the supplies cost in terms of the number of patients served, those costs actually had a 1.7% variance last year. We spent more per patient on supplies than we had expected to, but because of the way it was measured, it was not easy to make this determination. The role of managerial accounting is to provide useful information and with respect to supplies expense, this has not previously been the case. The information presented can be much more robust.

Therefore, another recommendation is to tie supplies costs to patient visits, rather than to nursing hours. This is more appropriate than the current method because efficiency of supply costs is weighed against patient visits. As such, it makes no sense to budget them on the basis of nursing hours. This structural change in our accounting will place increased focus on these costs as related to outputs. This will allow management to maintain closer control of this particular cost category when patient visits increase.

The main driver for the cost increases in the last month was the dramatic spike in nursing costs, which in turn were driven by an increase in the average wage paid per nursing hour. The most important step in containing costs is to reduce this hourly wage. The other option for Linda is to ensure management agrees that the budgeted average nursing wage should increase. Given the range of wages paid to nurses at the emergency room, this is another reasonable alternative.