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Introduction

In general terms, variance analysis involves comparing the budgeted amount for an item with the actual amount spent to identify fiscal variances. The purpose of variance analysis is to pinpoint the cause of such fiscal variances. Armed with this knowledge, the nurse manager can take corrective action to prevent such occurrences in the future.

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You can't undo what has already been done, but you can take corrective action to improve operational and fiscal performance going forward.

Conducting Variance Analysis

When conducting variance analysis, you analyze variances in the following three items:

  • Efficiency: Also known as the quantity variable or use variable. In this context, efficiency variances reflect how accurately the nurse manager budgeted for care hours provided. For example, suppose a nurse manager budgets for x number of care hours per day, but the actual number turned out to be higher. The result would be a negative efficiency and budget variance (unless the increased nursing care hours were due to increased volume) because more care hours provided translates to more money spent on staffing.

  • Volume: This relates to the number of patients for whom care was provided. Generally, increased patient volume means both increased revenue and increased cost. When volume increases, nurse managers need more staff to provide the same number of nursing hours per patient day.

  • Cost: Cost variances relate to how many dollars are spent to deliver care. If a nurse manager provides more hours of care than were budgeted, the additional staffing to provide that care would likely be paid in overtime, agency, or bonus dollars, resulting in a higher cost to deliver the care.

Understanding Bonus Dollars

Bonus dollars are generally funds paid to entice an employee to work extra hours. For example, part-time employees usually do not receive overtime pay unless they work 40 hours in a given week. To encourage part-time employees to work extra shifts, organizations might offer a bonus rate, which is higher than the part-time hourly rate.

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Calculating efficiency, volume, and cost variances improves your ability to diagnose problems and identify corrective measures to improve performance.

Calculating Variances

Table 7.1 shows a sample budget report from a one-month period.

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TABLE 7.1 SAMPLE BUDGET REPORT
Budget Actual Budget Variance
Patient days 425 499 74
Nursing care hours 1,790 2,290 500
Average hourly pay rate $40/hour $45/hour $5/hour
Total payroll costs $56,925 $88,791 $31,866

As you can see, this nursing unit's total payroll costs are $29,870 over the budgeted amount of $56,925. Let's analyze the three critical items—efficiency, volume, and cost—to determine whether this variance is a cause for concern.

Step 1: Calculating the Efficiency Variance

To calculate the efficiency variance ...

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