Question
Cost System Choices, Budgeting, and Variance Analyses for Second Heart Hospital Chapters Objectives Examples 5 5-1 5-2 9 5-2 5-3 10 5-4 10-1 9-1 10-3
Cost System Choices, Budgeting, and Variance Analyses for Second Heart Hospital
Chapters | Objectives | Examples |
5 | 5-1 | 5-2 |
9 | 5-2 | 5-3 |
10 | 5-4 | 10-1 |
| 9-1 | 10-3 |
| 10-1 | 10-4 |
| 10-3 | 10-5 |
| 10-4 | 10-6 |
| 10-5 |
|
The purpose of this integrated exercise is to demonstrate how a change in the cost systems allocation base can result in significantly different costs for control purposes (e.g. the cost of various service lines), as well as significantly different budgeted costs for planning purposes (e.g. flexible budgets and variances analyses).
The Two Cost Systems
Scared Heart Hospitals (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). SHHs current cost system assigns total nursing costs to the ER and OR based on the number of patients serviced by each line. Total hospitals annual nursing costs for these two lines are expected to equal $300,000. The table below shows expected patients volume for both lines.
Measure | ER | OR | Total |
Number of patients (ER visits or OR surgeries) | 1,000 | 1,000 | 2,000 |
Number of vital signs checks | 2,000 | 4,000 | 6,000 |
Number of nursing hours | 10,000 | 5,000 | 15,000 |
Required:
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Using the current cost system, calculate the hospital-wide rate based on number of patients.
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Calculate the amount of nursing costs that the current cost system assigns to the ER and to the OR.
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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 (SHHs accountant) decided that assigning nursing costs to the two service lines based on the number of times that nurse must check patientss vital signs might more closely match the underlying use of the costly hospital resources. Therefore, for comperative purposes, Jack decided to develop a second cost system that assigns total nursing costs to the ER and OR on the number of times nurses patients vital signs. The systems is referred to as the vital-signs costing system. The earlier table also shows data for vital signs checks for lines.
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Using the vital-signs costing system, calculate the hospital-wide rate based on the number of vital signs checks.
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Calculate the amount of nursing costs that the vital signs costing system assigns to the ER and the OR.
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Using the results from the 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 flexible budget variances (I.e, flexible budget costs actual costs) for OR nursing costs, including the price variance and efficiency variance. 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 systems estimate of the cost per OR nursing hour as the standard cost per OR nursing hour. Jack collected the following additional information for the 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 = 5000
Actual OR nursing costs = $190,000
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For the OR service line, use the information above and the cost per OR nursing hour under the current cost system to calculate the,
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Flexible budget variance. (Hint: Use your answer to Requirement 3 as the standard cost per OR nursing hour for the current cost system.)
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Price variance.
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Efficiency variance.
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For the OR service line, use the information abbove and the cost per OR nursing hour under the vital signs costing system to calculate the
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Flexible budget variance. (Hint: Use your answer to Requirement 6 as the standard cost per OR nursing hour for the vital signs costing system.)
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Price variance.
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Efficiency variance.
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