MAKING THE CONNECTIU INTEGRATIVE EXERCISE (CHAPTERS 5-10) Cost System Choices, Budgeting, and Variance Analyse for Sacred Heart Hospital Chapters Objectives Cornerstones 7-2 7.1 7-2 74 10-1 10-3 9.1 10-1 10-4 10-5 10-6 10-3 10-4 10-5 The purpose of this integrated exercise is to demonstrate how a change in the cost system's base can result in significantly different reported costs for control purposes (eg, the cost of service finest as well as significantly different budgeted costs for planning purposes leg budgets and variance analyses) The Two Cost Systems Sacred Heart Hospital (SHH) faces skyrocketing nursing costs, all of which relate to its two be nursing service lines-the Emergency Room (ER) and the Operating Room (OR). SHH's current tem assigns total nursing costs to the ER and OR based on the number of patients serviced by line. Total hospital annual nursing costs for these two lines are expected to equal $300,000. The 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 OR 3. Using the results from Requirement 2, calculate the cost per OR nursing hour under the cure cost system After discussion with several experienced nurses, Jack Bauer (SHH's accountant decided that ang nursing costs to the two service lines based on the number of times that nurses must check pe vital signs might more closely match the underlying use of costly hospital resources. Therefore purposes. Jack decided to develop a condo m on his computer that is to the ER and OR based on the numero u s check patients wital signs r e d to as the signs costing system. The earlier table also shows data for check for vital signs costing system, calculate the hospitale non checks t b ed on the number of all the amount of nung costs that the l the OR o sting system a s to the ER and to the results from Requirement 5. calculate the cost per OR nursing hour under the vital-signs ting system Budgeting and Variance Analysis to better plan for and control OR costs. S ma c k to calculate the variance e, flexible budget costs-actual costs for OR and efficiency variance that make up the flexible budetyrance for OR nursing costs. Given ng costs, including the price is interested in comparing the reported costs of both where he decided to prepare the OR vanance analysis for both the current cost system and the vital signs costing system. In Jack chose to use each cost system's estimate of the cost per OR nursing hour as the standard OR nursing hour. Jack collected the following additional information for use in preparing the feble budget variance for both systems: cual number of surgeries performed - 950 Onderd number of nursing hours allowed for each OR surgery - 5 al number of OR nursing hours used -5,000 OR nursing costs $190,000 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 efficiency variance. 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 as the standard cost per OR nursing hour for the vital signs cost system.) b price variance. c elficiency variance. Discussion of Reported Costs and Variances from the Two Systems Consider SHH's need to control its skyrocketing costs, Jack's discussion with experienced nurses regarding their 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? Briefly explain the reasoning behind your choice. at does each of the calculated variances suggest to Jack regarding actions that he should or did not take with respect to investigating and improving each variance? Also, briefly explain y the variances differ between the two cost systems
