Integrative Exercise Cost System Choices, Budgeting, and Variance Analyses for Sacred Heart Hospital

The Two Cost Systems

Sacred Heart Hospital (SHH) faces skyrocketing nursing costs, all of which relate to its two biggest nursing service linesthe Emergency Room (ER) and the Operating Room (OR). SHH's current cost system 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			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:

1. Using the current cost system, calculate the hospital-wide rate based on number of patients.

$ ____________per patient

2. Calculate the amount of nursing costs that the current cost system assigns to the ER and to the OR.

The nursing cost, assigned to the ER	$_______
The nursing cost, assigned to the OR	$_______

3. Using the results from Requirement 2, calculate the cost per OR nursing hour under the current cost system. $ _______per OR hour

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 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 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. $_______per vital signs check

5. Calculate the amount of nursing costs that the vital-signs costing system assigns to the ER and to the OR.

The vital-signs cost, assigned to the ER	$_______
The vital-signs cost, assigned to the OR	$_______

6. Using the results from Requirement 5, calculate the cost per OR nursing hour under the vital-signs costing system. $________ per OR hour

Budgeting and Variance Analysis

In an effort to better plan for and control OR costs, SHH management asked Jack to calculate the flexible budget variance (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 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

Enter a favorable variance as a negative amount, and an unfavorable variance as a positive amount. If there is no variance, enter "0" and select "No variance" from the dropdown.

7. For the OR service line, use the information above and the cost per OR nursing hour under the current 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.) $________Unfavorable

b. price variance. $__________ Unfavorable

c. efficiency variance. $_________ Unfavorable

8. For the OR service line, use the information above and the cost per OR nursing hour under the vital-signs costing 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.) $ __________No variance

b. price variance. $ __________Favorable

c. efficiency variance. $ ___________Unfavorable