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Variance Analysis

Variable hospital departments are important for hospitals in a variety of ways. When addressing issues of budgets, variance reports come in as essential tools that help hospitals in the management of their budgets and funds. A budget acts as a strategic financial planning tool for an organization that helps it to organize and balance their finances and funds. A budget variance comes in when a difference arises between the plan and the outcome, for example when a hospital variance unit receives its monthly budget outcome, which states that the wages were higher and the funds were lower than planned in accordance with the budget. When thinking about a budget variance, a manager must differentiate between aspects that affect the budget, and can be controlled versus those that cannot be controlled. A budget variance can occur because of several reasons, one of which could be the fact that the budget was poorly and inadequately planned. It is an example of the factor that can be controlled.

A variance report is a good way for managers to measure the company performance by putting sets of figures against others; for instance, a planned amount versus an actual amount, and seeing the difference between them. Several factors are considered when writing a budget variance. A well-organized variance report addresses such factors as trends, overspending, and under spending. The world changes as time goes by, and health care organizations also change with respect to the factors in the environment, and expectations of the patients and people, who work in those organizations. One of the most important aspects of trends to be captured in a variance report is the changing economic times that may force an organization to overspend or under spend. Thus, a variance report must put into consideration the trends in spending. If there is a trend towards overspending or under spending, then the budget must be revised. Trends are best depicted in graphic terms, and they help to reveal to an analyst whether there is a minor or a major budget lapse (Finkler & McHugh, 2008).

Another factor that must be put into consideration when writing a variance report is an aspect of overspending. Overspending can cause serious problems to the project that is ongoing, or the one that is under planning, as well as to other projects, just in case the organization runs out of resources. Thus, the vice president must know whether there is an aspect of overspending, and by what margin. A variance report is important for this purpose because it should communicate such information, so that the appropriate action can be taken. Another facet that a variance report must consider, is under spending. Under spending indicates problems in issues of quality control, if the budget was planned correctly. If the budget was not planned well, then the variance report will indicate an issue of over allocation. Thus, a variance report must consider this aspect to show whether the budget was done as required, and that everything was planned adequately. The mentioned factors are very important when writing a variance report, and if left out, it may cause a serious problem in terms of managing the organization’s funds (Berger, 2008).

The abovementioned three factors cover changes in input prices, changes in input productivity, and changes in departmental volume. Trends can influence the increase or decrease in input prices, input productivity, and departmental volume that could in turn influence spending towards overspending, or towards under spending.

There is an important relationship between variance reporting, interpreting variance report results, and actual results of performance. Variance reporting is done when the results are available. Every month, a variance report must be provided to the vice president, meaning that there are results that are realized every month. If a variance is reported and not interpreted, then it has no importance to the organization, and will not communicate anything to the enterprise. For example, as a manager of the variable hospital unit, I received the monthly budget results for the department, and they show that the funds were lower than budgeted, while the wages were higher. The information will be meaningless if it is not interpreted; thus, I have to compare the budget results with the budget plan, and interpret the meaning of the difference to make sense of what went wrong. When reporting to the vice president, interpretation is important because a variance report has a purpose of revealing the issues that caused the differences between the budget plan and actual results. Hence, a variance report must communicate the budget plan and the monthly budget results. It means that variance reporting has a core function of communicating actual results performance that has been realized in that month (Allen, 2011).

The function of variance reporting is not just reporting the variations that occurred between the budget and budget results. Interpreting does not just serve the purpose of defining the figures contained in a variance report. Variance reporting and interpretation of the variance report results have a relationship in the sense that interpretation of variance report results cannot happen without variance reporting, and actual results of performance cannot be found without variance reporting and interpretation of the variance report results. Each of these helps the other to occur. Variance reporting leads to interpretation, which in turn leads to finding the actual performance results. Likewise, actual performance results depend on the undertaking of interpretation of the variance report results, and this depends on the availability of variance reporting. The given relationship helps in variance analysis, and aids to formulate a variance analysis model, which separates cost variations and factors that suggest cause, and lead to corrective actions (Berger, 2008).


Allen, J. E. (2011). Nursing Home Administration. New York, NY: Springer Publishing Company.

Berger, S. (2008). Fundamentals of Health Care Financial Management: A Practical Guide to

Fiscal Issues and Activities. New York, NY: John Wiley & Sons.

Finkler, S. A., & McHugh, M. L. (2008). Budgeting Concepts for Nurse Managers. New York, NY: Elsevier Health Sciences.

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