Over Budget on Supplies: A Flexible Budget Variance Analysis for a 28-Bed Medical Unit
Student Name
Master of Science in Nursing Program, Aspen University
N542: Health Care Finance and Economics
Instructor Name
Month Day, Year
Over Budget on Supplies: A Flexible Budget Variance Analysis for a 28-Bed Medical Unit
The first-quarter report for a composite 28-bed medical unit arrived with one line in red. Medical and surgical supplies were budgeted at $85,500 for the quarter and actual spending was $101,376, an unfavorable variance of $15,876, or 18.6%. The finance office asked the nurse manager for an explanation within two weeks. A single number like this says only that spending was higher than planned. It does not say why, whether the cause was within the unit's control, or what should be done.
Supplies deserve the attention. Across more than 3,500 U.S. hospitals, supplies made up about 15% of total expenses on average, second only to payroll, and a larger share in surgery-intensive hospitals (Abdulsalam & Schneller, 2019). This paper uses a flexible budget to separate the unit's variance into its volume, price and usage components, investigates the causes of each, and recommends actions and a plan for monitoring the rest of the year.
The Flexible Budget Method
A static budget measures actual spending against a plan made before the year began, at the volume expected then. A flexible budget adjusts the plan to the volume that actually occurred, which separates the part of a variance caused by serving more or fewer patients from the part caused by spending differently per patient. Finkler et al. (2013) describe three components for a variable expense. The volume variance is the change in patient days multiplied by the budgeted cost per patient day. The price variance is the extra cost of paying more per item than budgeted for the items actually used. The usage, or quantity, variance is the extra cost of using more items per patient day than budgeted, valued at budgeted prices. The three always add up to the total variance.
The Calculation
The budget assumed an average daily census of 25 over the 90-day quarter, or 2,250 patient days, at $38 of supplies per patient day. The unit actually averaged 26.4 patients, or 2,376 patient days. The flexible budget, what the unit should have spent at actual volume and budgeted rates, is 2,376 multiplied by $38, or $90,288. Purchasing records showed that prices on the unit's supply basket rose by an average of 5% when the group purchasing contract renewed in January, mostly on examination gloves, intravenous start kits and wound dressings. Dividing actual spending by 1.05 gives $96,549, what the unit's actual usage would have cost at budgeted prices.
| Component | Calculation | Variance |
|---|---|---|
| Volume | (2,376 minus 2,250) patient days x $38 | $4,788 unfavorable |
| Price | $101,376 actual minus $96,549 at budgeted prices | $4,827 unfavorable |
| Usage | $96,549 at budgeted prices minus $90,288 flexible budget | $6,261 unfavorable |
| Total | $101,376 actual minus $85,500 static budget | $15,876 unfavorable |
Interpreting Each Component
The volume variance of $4,788 reflects a busier quarter, 126 more patient days than planned. It is unfavorable only in the narrow sense that more was spent; each additional patient day also brought revenue, and the variance is not a management problem. The manager should report it as explained.
The price variance of $4,827 is real but outside the unit's control. Contract prices are negotiated by the supply chain department, and the 5% increase will persist for the rest of the contract year. It should be explained and built into the budget for the remaining quarters, with a request that supply chain review whether equivalent products are available at lower prices.
The usage variance of $6,261 is the part that belongs to the unit, and it required investigation. The manager reviewed the unit's automated supply cabinet reports with the charge nurses and the wound care nurse. Three causes accounted for almost all of it. Silver-impregnated antimicrobial dressings, stocked for infected wounds, had been used routinely on clean surgical and skin tear wounds after a traveler nurse introduced the practice; the extra cost was about $2,950. Intravenous start kits were being opened for every attempt and discarded when an attempt failed, adding about $1,590. And a cluster of Clostridioides difficile cases in February required contact precautions for several patients for most of the month, adding about $1,720 in gowns and gloves.
Actions
The three usage causes call for different responses. The dressing use is a practice problem: the wound care nurse will present a one-page guide showing which wounds need antimicrobial dressings and which do not, the cabinet will require a reason code when silver dressings are removed, and charge nurses will review the reason codes weekly for a month. The discarded start kits reflect a supply design problem: the unit will stock individual catheters so that a second attempt uses only the catheter, not a new kit. The isolation supplies, by contrast, were appropriate. Current guidelines call for gowns and gloves when caring for patients with C. difficile infection (McDonald et al., 2018), so the right response is to explain the cost, not to reduce it; if anything, the cluster argues for continued attention to hand hygiene and environmental cleaning to prevent the next one.
The manager's report to finance should therefore say that, of the $15,876 variance, about $4,788 came from higher volume, $4,827 from contract prices, $1,720 from necessary isolation precautions and about $4,540 from two practices the unit is correcting.
Monitoring for the Rest of the Year
Three measures will be tracked monthly: supply cost per patient day against a revised target of $39.90, which is the original $38 plus the 5% price increase; silver dressing removals per 100 patient days; and intravenous start kits used per peripheral line placed. If supply cost per patient day stays above the revised target for two months after the practice changes, the manager will review cabinet data again with the wound nurse and the vascular access lead. The revised target should also be carried into next year's operating budget, because the contract prices are not temporary.
Conclusion
A $15,876 overrun on supplies looks like a single problem but is really four: more patients, higher prices, one clinical necessity and two avoidable practices. The flexible budget separates them, and investigation turns the usage variance into specific actions. For a nurse manager, the value of variance analysis lies less in the arithmetic than in the conversation it starts, one that protects necessary care, corrects waste and gives the finance office an explanation it can trust.
References
Abdulsalam, Y., & Schneller, E. (2019). Hospital supply expenses: An important ingredient in health services research. Medical Care Research and Review, 76(2), 240-252. https://doi.org/10.1177/1077558717719928
Finkler, S. A., Jones, C. B., & Kovner, C. T. (2013). Financial management for nurse managers and executives (4th ed.). Elsevier Saunders.
McDonald, L. C., Gerding, D. N., Johnson, S., Bakken, J. S., Carroll, K. C., Coffin, S. E., Dubberke, E. R., Garey, K. W., Gould, C. V., Kelly, C., Loo, V., Shaklee Sammons, J., Sandora, T. J., & Wilcox, M. H. (2018). Clinical practice guidelines for Clostridium difficile infection in adults and children: 2017 update by the Infectious Diseases Society of America (IDSA) and Society for Healthcare Epidemiology of America (SHEA). Clinical Infectious Diseases, 66(7), e1-e48. https://doi.org/10.1093/cid/cix1085
How this N 542 Module 7 example is structured
Aspen does not publish N542 module prompts, so check your classroom for the exact instructions and data. This example states the variance, explains the flexible budget method and its three components, calculates them in a table that reconciles to the total, judges each for controllability, traces the usage variance to specific practices, and ends with actions and monitoring.
N542 Module 7 questions, answered
What does N542 Module 7 usually ask for?
Budgetary considerations run through Aspen's N542 description, and explaining why a unit went over or under budget is a standard nurse manager task, so a variance analysis is a typical module assignment. Check your classroom for the data and format provided.
What is a flexible budget?
A flexible budget restates the original budget at the volume that actually occurred, using the budgeted cost per unit of service. Comparing actual spending with it separates the effect of volume from the effect of spending more or less per patient.
Is an unfavorable variance always bad?
No. A volume variance from caring for more patients usually comes with more revenue, and some spending, such as isolation supplies during an outbreak, is necessary. The purpose of the analysis is to find which parts are controllable and should change.
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