Determine the revenue variance from Arcadia Hospital’s 2005 budget. Is the variance positive or negative? Upon reviewing the Arcadia Hospital Income Statement for the year of 2005, I would say that the variance is negative because the actual budget for 2005 $568 million minus the budget of $596 million equals a negative amount of $28 million under budget, which means less revenue. In other word, revenues were $28 million below budget, therefore the variance is negative. Which is desirable, a positive or negative variance?
Why? Because this is revenue being discussed it is desirable to be positive. With a positive variance that would mean Arcadia brought in more revenue; however, if it is a negative variance it means less revenue was brought in than anticipated. Revenue variances where actual revenue is above budget (a positive result) are better as they result in higher or less negative profits, whereas variances where actual revenues are below budget (a negative result) are bad or critical as they result in lower or more negative profits.
What do you think are some of the possible causes for this variance? In reviewing Arcadia Hospital Income Statement for the year of 2005, some possible causes for this variance can be poor level of care from the hospital or low prices, such as lower-paying procedures across all beds or low occupancy rates for beds than expected. Some other possibilities could be the hospital having a backup in paperwork, which necessary for billing and insurance reimbursement or too much competition from other hospitals within their area.
How would you adjust Arcadia Hospital’s 2006 budget in light of your variance analysis? I will adjust Arcadia Hospital’s 2006 budget by basing it on their 2005 results. If the hospital does not look forward to taking action to increase revenue, then the plan for forthcoming years may need to be decreased if they expect diminished revenue streams going forward.