$212,000 Over Budget in One Quarter: Separating Volume, Rate and Efficiency in the Maternity Service Line's Labor Variance and Explaining It to Leadership
[Student Name]
University of Phoenix
NSG/567: Financial Resources Management in Health Care
Week 4 Assignment
[Instructor Name]
[Date]
The hospital, its service line and all figures are a composite written for a model paper.
The maternity operating budget prepared in Week 2 assumed 1,900 births a year and $10.9 million in salaries and benefits. At the end of the second quarter, the monthly report showed registered nurse labor expense $212,000 over the quarterly budget, and the chief financial officer asked for an explanation. A single number over budget says little; this paper separates it into its parts and finds what drove each.
The Numbers
Quarterly budget: 475 births, 6,888 registered nurse productive hours in labor and delivery at 14.5 hours per birth, at an average cost of $61.20 an hour including differentials and benefits, for $421,500 in labor and delivery nursing labor. Similar calculations for postpartum and the nursery bring the quarterly registered nurse labor budget for the service line to $2,112,000.
Actual quarter: 518 births, 9% above budget; 8,046 labor and delivery productive hours, 15.5 hours per birth; and an average cost of $66.40 an hour, higher because of agency nurses and overtime. Actual registered nurse labor for the service line was $2,324,000.
Total variance: $212,000 unfavorable.
Step 1: The Flexible Budget
A flexible budget asks what labor should have cost at the actual volume, using budgeted hours per birth and budgeted rates (Finkler et al., 2013). For labor and delivery, 518 births at 14.5 hours per birth is 7,511 hours, at $61.20 an hour, $459,700. Repeating the calculation for postpartum and the nursery, where volume also rose, gives a flexible budget for the service line of $2,241,000.
Step 2: The Volume Variance
The volume variance is the flexible budget minus the original budget: $2,241,000 minus $2,112,000, or $129,000 unfavorable. Most of the overrun, $129,000 of $212,000, is not overspending at all; it is the cost of caring for 43 more births than planned. Volume variances are generally favorable to the organization when revenue rises with volume, and births above budget also brought additional revenue.
Step 3: The Rate Variance
The rate variance is the difference between the actual and budgeted hourly cost, multiplied by actual hours. For the service line, actual hours were 35,100 at $66.40 versus a budgeted $61.20 blend, a difference of $5.20 an hour. Rate variance: about $54,000 unfavorable for the service line after adjusting for unit mix. The cause was agency staffing: three labor and delivery vacancies were filled with agency nurses at about $98 an hour, and overtime rose.
Step 4: The Efficiency Variance
The efficiency variance is the difference between actual and flexible hours, at the budgeted rate. In labor and delivery, actual hours of 8,046 exceeded flexible hours of 7,511 by 535, or about $32,700 at $61.20. Across the service line, the efficiency variance was about $29,000 unfavorable after small favorable variances in postpartum. The three variances, $129,000, $54,000 and $29,000, add to the $212,000 total.
Why Standards Matter to the Efficiency Variance
Some of the added hours were required, not inefficient. Perinatal staffing standards require a nurse dedicated to a single patient in certain circumstances, among them pushing and serious maternal complications (Association of Women's Health, Obstetric and Neonatal Nurses [AWHONN], 2022). When more women are induced or have complications, safe staffing requires more hours per birth. An unfavorable efficiency variance of this kind is a signal to look at clinical patterns, not a reason to cut staffing below the standards.
Nursing's Share of the Overrun
Because registered nurse labor is such a large share of hospital costs (Welton, 2011), labor variances draw close attention from finance. Presenting them with their causes, rather than as a single figure, protects the service line from across-the-board cuts that would not address the real drivers.
Investigating Causes
Arithmetic shows where the overrun came from; investigation shows why.
Volume: births rose because the new family medicine group began delivering at the hospital earlier than expected and a neighboring hospital's labor unit had staffing closures on several weekends, diverting patients. The first cause is likely to continue; the second is temporary.
Rate: agency use came from three vacancies unfilled since the budget was prepared. Two positions have now been filled with nurses starting next quarter.
Efficiency: hours per birth rose from 14.5 to 15.5. Review of the quarter found two drivers. The cesarean rate rose from 30% to 34%, and cesareans require more labor and delivery nursing hours for circulating and recovery. And more women received oxytocin for induction, which increases one-to-one nursing time under the unit's staffing standards. The cesarean rise was concentrated among first-time mothers with term, single, head-down babies, the group quality programs watch most closely.
Revenue Context
Leadership should see the revenue side as well. The additional 43 births brought about $480,000 in net revenue, and cesareans generally generate higher payment than vaginal births, so the service line's contribution margin for the quarter was higher than budgeted despite the labor overrun. A variance report that showed only expense would have made a good quarter look bad.
Lessons for Next Year's Budget
The analysis also improves the next budget. Volume forecasts will include a range, not a single number, and staffing will be planned for the upper end of the range with flexible coverage. Hours per birth will be budgeted separately for vaginal births, cesareans and inductions, so that a change in the mix is visible as a mix effect rather than hidden in efficiency.
Actions
Volume: revise the annual volume forecast from 1,900 to 1,960 births, with staffing adjusted accordingly. Rate: complete hiring for the remaining vacancy and reduce agency use to zero by the fourth quarter; monitor overtime weekly. Efficiency: refer the rise in cesareans among first-time mothers to the obstetric quality committee, since it is a quality concern as well as a cost driver, and review induction scheduling practices.
The Explanation to Leadership
The explanation sent to the chief financial officer began with the conclusion: the quarter's labor overrun of $212,000 was mostly volume, $129,000, matched by higher revenue; $54,000 came from agency and overtime rates driven by vacancies now largely filled; and $29,000 came from more hours per birth, driven by a rise in cesareans and inductions that the quality committee will review. It then listed the actions and the measures that will show whether they work.
Follow-Up
The next quarter's report will show whether agency use fell and whether hours per birth returned toward budget as the cesarean review proceeds, and the explanation will be updated for leadership.
Conclusion
A flexible budget separated the $212,000 overrun into a volume variance of $129,000, a rate variance of $54,000 and an efficiency variance of $29,000. Investigation found that volume rose from a new physician group, rates rose from agency staffing and efficiency fell partly because of more cesareans and inductions. Explaining the variance this way gave leadership a picture of a busy, financially positive quarter with specific, fixable cost drivers and a quality question worth asking.
References
Association of Women's Health, Obstetric and Neonatal Nurses. (2022). Standards for professional registered nurse staffing for perinatal units (2nd ed.).
Finkler, S. A., Jones, C. B., & Kovner, C. T. (2013). Financial management for nurse managers and executives (4th ed.). Elsevier Saunders.
Welton, J. M. (2011). Hospital nursing workforce costs, wages, occupational mix, and resource utilization. Journal of Nursing Administration, 41(7/8), 309-314. https://doi.org/10.1097/NNA.0b013e3182250a2b
How this NSG 567 Week 4 example is structured
The NSG/567 description includes budget analysis and monitoring. This paper shows a variance analysis done the way finance teams expect: a flexible budget first, then each variance calculated and explained, then causes investigated beyond the arithmetic and actions stated, so that leadership learns not only how much but why and what will change. Students search this week as NSG 567 Week 4, NSG567 Wk 4 or NSG/567 Wk 4; all three are the same assignment.
NSG/567 Week 4 questions, answered
What does NSG/567 Week 4 usually ask for?
Many sections ask students to analyze budget variances for a unit or service, explain their causes and describe how they would respond.
What is a flexible budget?
A budget recalculated for the volume that actually occurred, so that differences caused by volume can be separated from differences caused by prices or efficiency.
What is the difference between a rate variance and an efficiency variance?
A rate variance comes from paying a different price per hour than budgeted, such as agency rates. An efficiency variance comes from using more or fewer hours per unit of work than budgeted.
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