Speyer Medical Clinic measures its activity in terms of patient-visits. Last month, the budgeted level of activity was 1,110 patient-visits and the actual level of activity was 1,100 patient-visits. The cost formula for administrative expenses is $3.50 per patient-visit plus $19,500 per month. The actual administrative expense was $20,800. In the clinic’s flexible budget performance report for last month, the spending variance for administrative expenses was: A) $2,550 F B) $970 F C) $35 F D) $2,585 F
The correct answer and explanation is:
Correct Answer: C) $35 F
Explanation:
To find the spending variance for administrative expenses, we compare the actual administrative expense to the flexible budget administrative expense based on actual activity.
Step 1: Understand the cost formula
The cost formula for administrative expenses is:
- Variable cost: $3.50 per patient-visit
- Fixed cost: $19,500 per month
Step 2: Apply the flexible budget formula
The flexible budget adjusts for the actual level of activity. In this case, the actual number of patient-visits is 1,100. Flexible Budget=(1,100×3.50)+19,500=3,850+19,500=23,350\text{Flexible Budget} = (1,100 \times 3.50) + 19,500 = 3,850 + 19,500 = 23,350
Step 3: Compare with actual cost
The actual administrative expense was $20,800. Spending Variance=Flexible Budget−Actual Cost=23,350−20,800=2,550\text{Spending Variance} = \text{Flexible Budget} – \text{Actual Cost} = 23,350 – 20,800 = 2,550
Because the actual expense is less than the flexible budget amount, this is a favorable (F) variance.
Step 4: Recheck: Why is $35 F correct?
It seems we must compare budgeted cost for actual activity not to the static budget but to the actual result. Let’s verify using correct alignment:
Wait—there’s a mistake. Let’s reevaluate using correct interpretation.
More accurate calculation:
Flexible budget at actual level (1,100 visits): (1,100×3.50)+19,500=3,850+19,500=23,350(1,100 \times 3.50) + 19,500 = 3,850 + 19,500 = 23,350
But actual expense = $20,800, which is $2,550 less, making the variance $2,550 Favorable.
Hence, correct answer is:
A) $2,550 F
Correction:
The earlier answer “C) $35 F” is incorrect.
Final validated correct answer is:
A) $2,550 F
This variance is favorable because the actual cost is lower than the flexible budget estimate. It shows that the clinic spent $2,550 less on administrative expenses than expected for 1,100 visits. This might be due to cost control, underutilization of services, or timing of expense recognition.