Question

U LUN ValldCE 8.3 Here are the budgets of Brandon Surgery Center for the most recent historical quarter (in thousands of dollars): Number of Surgeries Patient Revenue Salary Expense Nonsalary Expense Profit Static 1,200 $2,400 1,200 600 $ 600 Flexible 1,300 $2,600 1,300 650 $ 650 Actual 1,300,95 $2,535 1,365 585 $ 585 The center assumes that all revenues and costs are variable and hence tied directly to patient volume. a. Explain how each amount in the flexible budget was calculated. (Hint: Examine the static budget to determine the relationship of each budget line to volume.)

How do I solve for a-c?

Answer 1

• a)

  	Static Budget	Cost per surgery	Flexible budget
  No of surgeries	1200	---	1300
  Revenue	2400	2400/1200 = 2	1300* 2 = 2600
  Less: salary expense	1200	1200/1200 = 1	1300*1 = 1300
  Less: non-salary expense	600	600/1200 = 0.50	1300*0.5 = 650
  Profit	600		650

  b) Since we have to compute Variance based on volume , we take into account the static budget and compare with the actual

  Computation of variances

  	Total variance	Total Variance (%)	Price/expense Variance	Price/expense Variance (%)	Volume Variance	Volume Variance (%)
  Revenue	2535 - 2400 = 135 (F)	135/2400*100= +5.625%	((2535/1300)-2)*1300 = 65 (A)	((2535/1300)-2)/2*100 = -2.5%	(1300-1200) * 2= 200(F)	(1300-1200)/1200*100 = +8.33%
  Salary Exp.	1200-1365 = 165 (A)	-165/1200*100 = 13.75%	(1 - (1365/1300))*1300 = 65(A)	(1 - 1.05)/1*100 = -5%	(1200- 1300) * 1 = 100(A)	(1200-1300)/1300*100 = -7.69%
  Non salary expense	600 - 585 = 15(F)	+2.5%	(0.5 - (585/1300) * 1300 = 65(F)	+5%	(1200 - 1300) *0.5 = 50 (A)	+7.69%
  Profit	600 - 585 = 15 (A)	-2.5%

  c) Even though the Gross Revenues increased by 5.625% in actual compared to the budgeted (static), the net income fell down by 2.5%. Hence, Operations for the quarter were not satisfactory.

  please comment in case of any queries on the solution.