HIM 481 White Ch 5 Variance Analysis

Budget Cycle

1. Budget created 2. Compared to actual results 3. Analysis of significant variances 4. Corrective action 5. Feedback for next budget cycle

Variance

1. disagreement between two figures 2. The square of the standard deviation; a measure of variability that gives the average of the squared deviations from the mean 3. In financial management, the difference between the budgeted amount and the actual amount of a line item; in project mgmt., the diff between the original project plan and current estimates

Threshold

A boundary, beginning point, or target amount. Fixed cutoffs based primarily on historical experience

Standard deviation

A measure of variability that describes the deviation from the mean of a frequency distribution in the original units of measurement; the square root of the variance.

Intensity of service

A statistic that measures the level of diagnostic and therapeutic services required to treat a set of patients.

Decision tree

A structured data mining technique based on a set of rules useful for predicting and classifying information and making decisions

Statistical process control

A tool that may be used to ID budget variances that go beyond random occurrences. SPC is an alternative to setting fixed budget thresholds. -Analyze historical values compared to bell shaped curve -Identify when process is "out of control" -Out of control → significant budget variance -Appropriate for budget values that vary approximately symmetrically around an average

Specificity

Ability of the decision rule to not falsely ID a variance as significant or a false positive

Variance analysis

An assessment of the department's financial transactions to identify the exact cause of the diff between the budget amount and actual amount of the line item.

Controllable costs

Costs that can be influenced by a dept. director or manager

Cost Center

Groups of activities where costs are specified together for mgmt. purposes

Volume

Represent quantity of items produced or purchased to drive the budget line Examples: Laboratory tests Discharges Clinic visits Surgical trays

Sensitivity

The ability of a decision rule to detect a true difference

Unit price

The cost to produce the unit of volume or the revenue per unit volume Cost variance analysis: Cost to produce a unit Revenue variance analysis: Revenue per unit "Unit" must be defined the same as volume metric

Decision theory

The expected cost of investigating and not investigating a budget variance are calculated and compared to determine the most effective alternative.Includes the cost of "doing nothing" Decision theory assess the expected cost of each decision Investigate variance - find and fix root cause Do not investigate - continue to monitor for additional periods

Unfavorable variance

The negative difference between the budgeted amount and the actual amount of a line item. where actual revenue is less than budget or where actual expenses exceed budget

Favorable variance

The positive difference between budgeted amount and the actual amount of a line item, that is, when actual revenue exceeds budget or actual expenses are less than budget

Root Cause

The underlying event(s) that led to a problem, determined through methodical investigation

Normal Distribution

There is a 5% chance of observing a value outside of +/- 2 standard deviations from the mean Is used to identify outliers or variances worthy of investigation

Define various approaches to objectively defining significant budget variances.

Thresholds Statistical Process Control Charts Decision Theory

What do you analyze to understand the root cause of budget variances?

Volume Unit Price Intensity of Service (most difficult to measure)

Define Budget variance.

When the actual performance is different from the budget Budget variance = actual value - budget value Positive - actual > budget Negative - actual < budget