How is a budget variance analyzed in healthcare finance, and what distinguishes a favorable variance from an unfavorable one?

• A. Compare actual results to budgeted amounts; favorable variance means actual costs are higher and revenues lower than planned.
• B. Compare actual results to past year's results; favorable variance means costs reduced year over year.
• C. Compare actual results to budgeted amounts; favorable variance means actual costs are lower or revenues higher than planned, unfavorable means opposite.
• D. Compare actual results to industry benchmarks; favorable variance means costs are above benchmarks.

Answer: (C)

The main concept is variance analysis against the operating budget. You compare what actually happened to what you planned in the budget to see if performance stayed on track.

A favorable variance means you did better than planned on the financial side: actual costs came in lower than budgeted, or actual revenues came in higher than budgeted. This indicates efficient cost control or stronger-than-expected revenue performance. An unfavorable variance is the opposite: actual costs are higher than budgeted or actual revenues are lower than budgeted, signaling over-spending or weaker revenue.

In healthcare, this framework helps you spot where volume, pricing, payer mix, and cost control are driving performance away from the plan, so you can investigate the root causes and take corrective action. While comparing to past years or industry benchmarks can be useful for other analyses, variance analysis specifically uses the budget as the standard for judging performance.

So the correct approach is comparing actual results to budgeted amounts, with favorable meaning lower costs or higher revenues than planned, and unfavorable meaning the reverse.