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  • May 2022
  • Article
  • Issues in Accounting Education

Variance Analysis: New Insights from Health Care Applications

By: Robert S. Kaplan and Susanna Gallani
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Abstract

We use a health care application to illustrate how variance analysis can be used to benchmark costs across similar service delivery sites. Variances for personnel costs, typically the largest cost component in service organizations, are calculated for price, quantity, and skill mix components. Skill mix is important since employees with different compensation often work together to produce service outputs. We find that the joint variance, which arises when both prices and quantities differ, has more managerial implications when assigned to the quantity variance, rather than its traditional allocation to the price variance. Using time-driven activity-based costing also leads to a new variance that reflects the impact of personnel capacity differences between sites. Finally, we introduce two new visualization tools to display the variances. Educators can teach students how variance analysis reveals opportunities to reduce personnel costs by identifying and transferring best practices across sites.

Keywords

Variance Analysis; Benchmarking; Time-Driven Activity-Based Costing; Health Care; Activity Based Costing and Management; Health Care and Treatment; Service Delivery; Service Industry

Citation

Kaplan, Robert S., and Susanna Gallani. "Variance Analysis: New Insights from Health Care Applications." Issues in Accounting Education 37, no. 2 (May 2022): 27–36.
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About The Authors

Robert S. Kaplan

Accounting and Management
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Susanna Gallani

Accounting and Management
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More from the Authors
  • The Effects of Electronic Medical Records on Hospital Utilization Costs By: Susanna Gallani, Luminita Enache, Xue Guo and Eddie Riedl
  • Telehealth Visits After Shoulder Surgery: Higher Patient Satisfaction and Lower Costs By: Evan A. O'Donnell, Jillian E. Haberli, Andres Muniz Martinez, Daniel Yagoda, Robert S. Kaplan and Jon J.P. Warner
  • Conduit Incentives: Eliciting Cooperation from Workers Outside of Managers' Control. Evidence from Hospital Hand Washing By: Susanna Gallani
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