10-6 10-4 10-5 The purpose of this integrated exercise is to demonstrate how a change in the cost system's allocation base can result in significantly different reported costs for control purposes (0.9., the cost of various service lines), as well as significantly different budgeted costs for planning purposes (e.g, flexible budgets and variance analyses). The Two Cost Systems Sacred Heart Hospital (SHH) faces skyrocketing nursing costs, all of which relate to its two biggest nursing service lines-the Emergency Room (ER) and the Operating Room (OR). SHH's current cost sys tem assigns total nursing costs to the ER and OR based on the number of patients serviced by each line. Total hospital annual nursing costs for these two lines are expected to equal $300,000. The table below shows expected patient volume for both lines. Measure ER Number of patients ER visits or OR surgeries) 1,000 Number of vital signs checks 2,000 Number of nursing hours 10,000 OR 1,000 4,000 5,000 Total 2,000 6,000 15,000 Required: 1. Using the current cost system, calculate the hospital wide rate based on number of patients 2. Calculate the amount of nursing costs that the current cost system assigns to the ER and to the OR 3. Using the results from Requirement 2, calculate the cost per OR nursing hour under the current cost system After discussion with several experienced nurses, Jack Bauer (SHM's accountant decided that assigning ng costs to the two con based on the number of times that must check atents vital signs might more closely match the underlying use of costly hospital resources. Therefore, for After discussion with several experienced nurses, Jack Bauer (SHH's accountant) decided that assigning nursing costs to the two service lines based on the number of times that nurses must check patients' vital signs might more closely match the underlying use of costly hospital resources. Therefore, for comparative purposes, Jack decided to develop a second cost system on his computer that assigns total nursing costs to the ER and OR based on the number of times nurses check patients' vital signs. This system is referred to as the "vital signs costing system. The earlier table also shows data for vital signs checks for lines 4. Using the vital-signs costing system, calculate the hospital-wide rate based on the number of vital signs checks 5. Calculate the amount of nursing costs that the vital-signs costing system assigns to the ER and to the OR 6. Using the results from Requirement 5. calculate the cost per OR nursing hour under the vital-signs costing system Budgeting and Variance Analysis In an effort to better plan for and control OR costs, SHH management asked Jack to calculate the flexi- ble budget variance (i.e., flexible budget costs-actual costs) for OR nursing costs, including the price variance and efficiency variance that make up the flexible budget variance for OR nursing costs. Given that Jack is interested in comparing the reported costs of both systems, he decided to prepare the requested OR variance analysis for both the current cost system and the vital signs costing system. In addition, Jack chose to use each cost system's estimate of the cost per OR nursing hour as the standard cost per OR nursing hour. Jack collected the following additional information for use in preparing the flexible budget variance for both systems: Actual number of surgeries performed - 950 Standard number of nursing hours allowed for each OR surgery - 5 Actual number of OR nursing hours used - 5,000 Actual OR nursing costs $190,000 7. For the OR service line, use the information above and the cost per OR nursing hour under the cur- rent cost system to calculate the a. flexible budget variance (Hint: Use your answer to Requirement 3 as the standard cost per OR nursing hour for the current cost system.) b. price variance c efficiency variance 8. For the OR service line, use the information above and the cost per OR nursing hour under the vital signs cost system to calculate the a. flexible budget variance (Hint: Use your answer to Requirement 6 as the standard cost per OR nursing hour for the vital signs cost system) b. price variance, officiency vanance price variance ency variance c Discussion of Reported Costs and Variances from the Two Systems 9. Consider Se's need to control syrocketing costs, Jack's discussion with experienced nurses regarding the use of hospital resources and the reported costs that you calculated from each cost system Based on these considerations, which cost system current or vital signs should Jack choose? Brely explain the reasoning behind your choice 10. What does each of the calculated variances suggest to lack regarding actions that he should on should not take with respect to investigating and improving each vanane? Also, breby explan by the cances der between the two cost s
