Controlling labor costs. Aptos Convalescent Home has a contract with its full-time nurses that guarantees a minimum of $2,000 per month to each nurse with at least 12 years of service. One hundred employees currently qualify for coverage. All nurses receive $20 per hour.

The direct labor budget for Year 1 anticipates an annual usage of 400,000 hours at

$20 per hour, or a total of $8,000,000. Management believes that, of this amount,

$200,000 (100 nurses x $2,000) per month (or $2,400,000 for the year) was fixed.

Thus the budgeted labor costs for any given month resulted from the formula Budgeted Labor Costs = $200,000 + ($14.00 x Direct Labor Hours Worked).

Data on performance for the first 3 months of Year 1 follow:

The results, which show favorable variances when hours worked were low and unfavorable variances when hours worked were high, perplex a hospital administrator.
This administrator had believed the control over nursing costs was consistently good.

a. Why did the variances arise? Explain and illustrate, using amounts and diagrams as necessary.

b. Does this budget provide a basis for controlling nursing costs? Explain, indicating changes that management may make to improve control over nursing costs and to facilitate performance evaluation of nurses.

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January February March Nursing Hours Worked 22,000 32,000 42,000 Nursing Costs Budgeted $508,000 $648,000 $788,000 Nursing Costs Incurred. 440,000 640,000 840,000 Variance 68,000 F 8,000 F 52,000 U