More Patients Explains Only a Quarter of It: A Flexible Budget Variance Analysis of a Medical-Surgical Unit's First-Quarter Labor Costs
Student Name
Doctor of Nursing Practice Program, Aspen University
DNP885: Strategic Planning and Financial Management
Instructor Name
Month Day, Year
More Patients Explains Only a Quarter of It: A Flexible Budget Variance Analysis of a Medical-Surgical Unit's First-Quarter Labor Costs
When a unit exceeds its budget, the first explanation offered is usually volume: there were more patients. Sometimes that is the whole story, but often it is not. This paper analyzes the first-quarter labor variance for 4 West, the composite 32-bed medical-surgical unit whose budget was examined in the previous module, using a flexible budget to separate the part of the overrun caused by higher volume from the parts caused by using more hours per patient and paying more per hour. It then traces each part to its operational causes and recommends responses.
The Headline Variance
The unit's labor budget, combining salaries, overtime premium, benefits, and contract labor, was $1,307,600 for the quarter. Actual labor expense was $1,562,000, an unfavorable variance of $254,400, or 19.5 percent. Census was also higher than planned: 2,610 patient days against a budget of 2,482, an average daily census of 28.4 rather than 27.2. The finance report simply lists the overrun; the manager's task is to explain it.
Method: The Flexible Budget
A static budget compares actual spending with a plan built for a different volume, so it cannot tell whether a unit spent too much for the patients it actually had. A flexible budget restates the plan at the actual volume, allowing the total variance to be divided into a volume variance, an efficiency or quantity variance, and a rate or price variance (Finkler et al., 2013). For this analysis, the budgeted labor cost per productive hour is $62.72, the annual labor budget of $5,230,400 divided by 83,395 budgeted productive hours, and the unit's approved standard remains 8.4 hours of direct care for each patient day.
Splitting the Variance
Table 1 shows the calculation.
| Component | Calculation | Amount |
|---|---|---|
| Budget at planned volume | 2,482 patient days times 8.4 hours times $62.72 | $1,307,600 |
| Flexible budget at actual volume | 2,610 patient days times 8.4 hours (21,924 hours) times $62.72 | $1,375,038 |
| Actual hours at budgeted rate | 23,230 actual productive hours times $62.72 | $1,456,986 |
| Actual cost | 23,230 hours at an actual $67.24 per hour | $1,562,000 |
| Volume variance | Flexible budget minus original budget | $67,438 unfavorable |
| Efficiency variance | 1,306 extra hours times $62.72 | $81,910 unfavorable |
| Rate variance | $4.52 more per hour times 23,230 hours | $105,052 unfavorable |
| Total | Sum of the three | $254,400 unfavorable |
Volume: The Part Nobody Should Worry About
Higher census accounts for $67,438, about 27 percent of the overrun. This portion reflects care delivered to 128 additional patient days at the planned staffing standard. It is not a management failure; the unit served more patients at the approved intensity, and the hospital presumably received revenue for them. It should be reported as such, not absorbed by cutting hours elsewhere.
Efficiency: More Hours Per Patient
The unit worked 8.90 productive hours per patient day against a standard of 8.4, using 1,306 more hours than the flexible budget allows. The staffing log explains most of them. The unit used 1,120 hours of one-to-one observation by nursing assistants for patients with delirium or at high risk of falls, a practice not built into the standard, which assumes no sitters. The other 186 hours went to four newly licensed nurses shadowing their preceptors during their first weeks on the unit.
Neither cause reflects waste, but both deserve decisions. Sitter hours rose sharply in August after two serious falls, and there is no protocol for when to start or stop one-to-one observation. The efficiency variance is really a question about whether the unit's patients have changed faster than its staffing standard. The orientation hours are an investment the division's residency plan will formalize and should be budgeted explicitly next year.
Rate: More Per Hour
The unit paid $67.24 per productive hour instead of $62.72, adding $105,052. Four causes account for it. Contract nurses worked about 3,050 hours against about 2,050 budgeted for the quarter, and each contract hour costs about $37.80 more than an employed nurse's fully loaded hour, adding roughly $37,700. Nonproductive time ran at 13 percent of paid hours rather than 11, largely sick calls during a respiratory illness outbreak among staff in September, which added about 600 paid hours, or $27,700. Overtime premium reached $51,000 against $30,000 budgeted, adding $21,000. And a 3 percent market adjustment for registered nurses, approved by the hospital effective August 1 after the budget was set, added about $19,000. Together these explain the rate variance to within a few hundred dollars.
What Is Controllable
Of the $254,400 variance, the volume portion and the market wage adjustment, about $86,400 together, were outside the manager's control. The sick-time increase was largely outside it too, although staff vaccination rates and a sick-call policy are worth reviewing. The controllable portion lies in sitter use, contract hours, and overtime, roughly $140,000. Even these are not simply matters of discipline. Contract hours and overtime rose because four positions were vacant for the whole quarter, and sitters rose after falls. Cutting hours to recover the variance would be the wrong response: in a large study, shifts with registered nurse staffing well below target were associated with higher patient mortality (Needleman et al., 2011).
Recommended Actions
First, adopt a sitter protocol with daily reassessment and alternatives such as bed alarms, video monitoring, or cohorting, and track sitter hours as their own line. Second, fill the four vacancies through the new graduate residency and review whether the budget's contract line reflects a realistic vacancy rate. Third, add orientation hours to next year's budget as a separate standard. Fourth, report the volume and market adjustment variances to finance with a request to flex the budget for them. Variance reports exist to prompt investigation and correction rather than blame (Penner, 2017), and a manager who arrives with the controllable and noncontrollable parts already separated, and a specific action for each controllable cause, turns the monthly review into a planning conversation.
Conclusion
4 West's $254,400 first-quarter labor overrun was only about one quarter volume. The rest came from sitter and orientation hours beyond the staffing standard and from contract labor, sick time, overtime, and a wage adjustment that raised the cost per hour. Explaining the variance this way points to specific fixes, a sitter protocol, filled vacancies, and an honest standard, rather than across-the-board cuts.
References
Finkler, S. A., Jones, C. B., & Kovner, C. T. (2013). Financial management for nurse managers and executives (4th ed.). Elsevier Saunders.
Needleman, J., Buerhaus, P., Pankratz, V. S., Leibson, C. L., Stevens, S. R., & Harris, M. (2011). Nurse staffing and inpatient hospital mortality. New England Journal of Medicine, 364(11), 1037-1045. https://doi.org/10.1056/NEJMsa1001025
Penner, S. J. (2017). Economics and financial management for nurses and nurse leaders (3rd ed.). Springer Publishing.
How this DNP 885 Module 4 example is structured
DNP885 expects variance analysis that explains why a line missed. Aspen does not publish module deliverables, so check your classroom for the exact prompt. This example states the static variance, builds a flexible budget, splits the variance into volume, efficiency and rate, traces each to causes, separates controllable from noncontrollable and recommends actions.
DNP885 Module 4 questions, answered
What does DNP885 Module 4 usually ask for?
This part of DNP885 typically asks for a variance analysis of a budget, explaining why actual results differed from plan and what should be done. Aspen does not publish module deliverables, so your classroom's instructions govern.
What is a flexible budget variance analysis?
It restates the budget at the actual volume so that the total variance can be split into a volume variance, an efficiency or quantity variance and a rate or price variance, each with different causes.
Should a manager cut staff to recover a labor variance?
Not as a reflex. First separate volume and noncontrollable causes, then address specific controllable causes, since staffing below need is associated with patient harm.
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