Hospital Costs and Explanation of Variances

The emergency room at Rochester General Hospital uses a flexible budget based on patients seen as the measure of activity. The hospital must maintain an adequate staff of attending and on-call physicians at all times, so patient activity does not affect physician scheduling. Nurse scheduling varies as volume changes, however. A standard of 0.5 nurse hours per patient visit was set. Hourly pay for nurses ranges from $9 to $18 per hour, and the average pay rate is $15 per hour. The hospital considers all materials to be supplies, a part of overhead; there are no direct materials. A statistical study showed that the cost of supplies and other variable overhead is more closely associated with nurse hours than with patient visits. The standard for supplies and other variable overhead is $10 per nurse hour.

The head physician of the emergency room unit, Brad Wong, is responsible for control of costs. During October the emergency room unit treated 4,000 patients. The budget and actual costs were as follows:

	Budget	Actual	Variance
Patient visits	3,800	4,000	200
Nurse hours	1,900	2,080	180
Nursing cost	$28,500	$33,180	$4,680
Supplies and other variable overhead	$19,000	$20,340	$1,340
Fixed costs	$92,600	$92,600	$0
Total cost	$140,100	$146,120	$6,020

1. Calculate price and quantity variances for nursing costs.
2. Calculate spending and efficiency variances for supplies and other variable overhead.
3. The hospitals chief administrator has asked Dr. Wong to explain the variances. Provide possible explanations.

The emergency room at Rochester General Hospital uses a flexible budget based on patients seen as the measure of activity. The hospital must maintain an adequate staff of attending and on-call physicians at all times, so patient activity does not affect physician scheduling. Nurse scheduling varies as volume changes, however. A standard of 0.5 nurse hours per patient visit was set. Hourly pay for nurses ranges from $9 to $18 per hour, and the average pay rate is $15 per hour. The hospital considers all materials to be supplies, a part of overhead; there are no direct materials. A statistical study showed that the cost of supplies and other variable overhead is more closely associated with nurse hours than with patient visits. The standard for supplies and other variable overhead is $10 per nurse hour. The head physician of the emergency room unit, Brad Wong, is responsible for control of costs. During October the emergency room unit treated 4,000 patients. The budget and actual costs were as follows: Budget Actual Variance Patient visits 3,800 200 Nurse hours 1,900 180 Nursing cost $28,500 $4,680 Supplies and other variable overhead $19,000 $1,340 Fixed costs $92,600 Total cost $140,100 $146,120 $6,020 1) Calculate price and quantity variances for nursing costs.