Variance Analysis

Suture Self is a health care service firm which provides health care services and education. In January of 2017, Mrs. Terry, a philanthropist, paid for all of Suture Self's rent for the year, which had previously been their only fixed cost (i.e. FOH is ignored in this question. Yay.). In order to demonstrate all the karma Mrs. Terry had garnered, Suture Self started tracking their costs in order to observe and hopefully improve their operations. In February (which has 28 days, for the record), the 10 full time employees recorded the following costs per day:

Costs and activity in February	Cost per day
Direct materials (gauze, sutures, etc.) @ 250$/patient	$50,000 / day
Number of patients	200 patients / day
Direct Labor ($20 / hour @ 80 hrs / day)	$1,600 / day
Variable Overhead (how-to-sew pamphlets, etc.) @ $50 / patient	$10,000 / day

In March (which has 31 days, again for the record), the employees decided to implement some cost saving efforts, by trying to convince their patients to use more generic drugs, which they believed would reduce their material costs. In general they felt like their efforts were successful.

Also in March, one of the employees fell sick and had to miss work, causing some of the other employees to fill in and charge overtime. This was concerning to them, as they worried this labor overage would end up undoing all their material-cost-saving efforts. So, with chagrin, they closed their books for the month of March, and recorded the following total costs:

Costs and activity in March	Total cost for March
Direct materials	$1,500,000
Number of patients	6200 patients
Direct Labor	$55,000
Total Direct Labor Hours	2500 hours
Variable Overhead	$321,000

Suture Self uses full absorption actual costing (not that it matters here), and allocates variable overhead on the basis of number of patients (same as as Direct Materials).

For the following questions, variances should be calculated comparing March's Actual numbers to February. Hint: think of days as the 'units' under consideration in the variance analysis.

1. Did Suture Self's cost saving effort for their Direct Material result in favorable or unfavorable price variance?

a: Favorable

b: Unfavorable

c: Neither (i.e. Variance = 0)

2. How much did the cost saving measures in March save (or cost) in Direct Materials? (Hint: this is the price variance)

3. How did Suture Self's total efficiency differ in March compared to February?

a: More efficient in March (favorable efficiency variance)

b: Less efficient in March (unfavorable efficiency variance)

c: No difference between March and February

4. What primarily drove the total efficiency variance from above, if any?

a: Direct Material

b: Direct Labor

c: Overhead

d: None, there was no variance

5. Were the employees correct that the overtime labor cost overage ended up undoing all their material-cost-saving efforts?

a: Yes

b: No

6. How much more or less did Suture Self spend in March than February (i.e. what is the total variance between March and February?)

7. Was this total variance from above favorable or unfavorable?

a: Favorable

b: Unfavorable

c: Neither (i.e. Variance = 0)

8. What primarily drove the overall difference in cost (if any) between March and February?

a: Price Variance

b: Efficiency Variance

c: Volume Variance

d: None (i.e. no difference in cost)