WMBA 6608 Week 5 Operating Budget Variance Memo Example

Memorandum

To: Chief Nursing Officer and Director of Finance, Prairie Ridge Medical Center

From: Nurse Manager, 4 West Medical-Surgical Unit, with the unit's finance partner

Date: April 14, 2026

Re: March 2026 operating budget variances

Summary

4 West spent $138,359 more on nursing labor in March than the static budget allowed. Most of that is not an overrun at all. The unit cared for 1,980 patient days against a budget of 1,800, ten percent more, and a budget flexed to actual volume accounts for $64,584 of the difference. The remaining $73,775 divides almost evenly between paying more per hour, mainly for agency and overtime, and using more hours per patient day, mainly for one-to-one sitters and new graduate orientation. Supplies ran $4,620 over the flexed budget. No other line exceeded the materiality threshold.

Materiality Threshold

This memo explains any variance of at least 5 percent of the flexed budget line and at least $10,000, and any variance a reader would expect to see addressed. Lines below that threshold are listed in the table but not discussed.

The Variances

Prairie Ridge Medical Center, the composite Iowa hospital, budgets 4 West to supply 7.8 nursing hours on every patient day, paid at an average of $46.00 an hour.

Table 1

4 West, March 2026: Static Budget, Flexible Budget and Actual

Supplies and linen budgets are $38 and $6 per patient day; education and travel is fixed.

Datar and Rajan (2021) explain why the flexible budget is the right comparison: a budget built for 1,800 patient days cannot judge spending at 1,980, because some costs should rise with volume. The gap separating the original budget from the flexed one, $64,584 for labor, reflects the extra patients, not unit management.

Labor: Rate and Efficiency

Actual labor was 16,236 hours at an average of $48.30 an hour. The flexible budget allowed 15,444 hours (1,980 days x 7.8) at $46.00.

Rate variance = (actual rate $48.30 minus budgeted rate $46.00) x actual hours 16,236 = $37,343 unfavorable.

Efficiency variance = (actual hours 16,236 minus flexible budget hours 15,444) x budgeted rate $46.00 = 792 hours x $46.00 = $36,432 unfavorable.

Together they equal the $73,775 labor variance.

The rate variance has two causes. The unit used 400 hours of agency nursing at about $95 an hour to cover two vacancies, a premium of about $19,600 over the budgeted rate, and paid about 770 hours of overtime, whose premium at half the base rate added about $17,710. The vacancies have been open since January. Lasater et al. (2021) documented chronic nurse understaffing in many hospitals before and during the pandemic, and agency premiums are its direct financial expression.

The efficiency variance also has two causes. Delirium among older surgical patients required about 420 hours of one-to-one sitters, which the staffing grid does not include. Four new graduate nurses started orientation, adding about 380 paired hours in which a preceptor and orientee covered one assignment. These two items account for about 800 hours, essentially the full 792-hour excess. Neither reflects poor scheduling, but both are predictable and should be budgeted.

Supplies

Supplies ran $4,620, or 6.1 percent, above the flexed budget. Read against volume first, the overrun is modest, and two delirium patients on prolonged precautions used additional bed alarms and protective supplies. The variance meets the percentage threshold but not the dollar threshold; it is noted for monitoring rather than action.

Lines Below Threshold

Linen was within 2 percent of the flexed budget. Education and travel was $2,800 under budget because a planned conference was moved to May; this is timing, not savings.

Actions

First, filling the two vacancies would remove most of the agency premium; the unit has offers out to two candidates. Second, finance and nursing should add a sitter allowance to the staffing grid based on the past six months' use, so the cost appears in the budget rather than as an efficiency variance. Third, orientation hours for new graduates should be budgeted in the months they start. Reiter and Song (2021) note that variance analysis is valuable when it changes the next budget, and these three changes would make April's comparison more informative.

References

Datar, S. M., & Rajan, M. V. (2021). Horngren's cost accounting: A managerial emphasis (17th ed.). Pearson.

Lasater, K. B., Aiken, L. H., Sloane, D. M., French, R., Martin, B., Reneau, K., Alexander, M., & McHugh, M. D. (2021). Chronic hospital nurse understaffing meets COVID-19: An observational study. BMJ Quality & Safety, 30(8), 639-647. https://doi.org/10.1136/bmjqs-2020-011512

Reiter, K. L., & Song, P. H. (2021). Gapenski's healthcare finance: An introduction to accounting and financial management (7th ed.). Health Administration Press.