The Two Cost Systems:
1. Hospital-Wide Rate (Current System) =
=
= $150 per patient
3. Costs Assigned to OR/Number of OR Nursing Hours:
$150,000/5,000 = $30 per OR hour
4. Hospital-Wide Rate (Vital-Signs System) =
=
= $50 per vital signs check
6. Costs Assigned to OR/Number of OR Nursing Hours:
$200,000/5,000 = $40 per OR hour
FOR SACRED HEART HOSPITAL
$300,000
COST SYSTEM CHOICES, BUDGETING, AND VARIANCE ANALYSES
MAKING THE CONNECTION:
INTEGRATIVE EXERCISE (Chapters 5, 9, and 10)
Total Hospital Nursing Costs
Total Patients
6,000 Total Vital Signs Checks
2,000 total patients
Total Number of Vital Signs Checks
Total Hospital Nursing Costs
$300,000
Making the Connection Integrative Exercise (Chapters 5, 9, and 10)
Budgeting and Variance Analysis:
7. a. Flexible Budget Variance = Flexible Budget Costs – Actual Costs
=(Number of Actual Surgeries
×
OR Nursing Hours Allowed per Surgery
×
Standard Cost per Surgery)
–
Actual Cost
= (950 × 5 × $30) – $190,000
= $142,500 – $190,000
= $47,500 U Flexible Budget Variance
c. Efficiency Variance
=
(Standard Quantity
–
Actual Quantity) × Standard Price
= [(950 × 5) – 5,000] × $30
= $7,500 U Efficiency Variance
8. a. Flexible Budget Variance
=
Flexible Budget Costs
–
Actual Costs
= (Number of Actual Surgeries × OR Nursing Hours Allowed per Surgery
× Standard Cost per Surgery)
–
Actual Cost
= (950 × 5 × $40) – $190,000
= $190,000 – $190,000
= $0 Flexible Budget Variance
Making the Connection Integrative Exercise (Chapters 5, 9, and 10)
Discussion of Reported Costs and Variances from the Two Systems:
9. Although answers will vary, most students likely will choose the vital-signs
costing system for numerous reasons, some of which should be included in the
following discussion. First, if the experienced nurses are correct, then the vital-
signs costing system should more accurately allocate costs to service lines
because its cost allocation base (number of times a patient’s vital signs are
one driver and, therefore, should be equally costly to operate, it is likely that
switching from one cost system to another will be costly at first, both in terms
of time, money, and “buy-in” from SHH managers and employees. Third, while
the vital-signs appears to be a more accurate cost system, it is possible that
additional conversations and analyses should be conducted to determine
whether a more advanced version of the vital-signs costing system would
produce even more accurate costs that would prove beneficial to decision
making. Finally, the more accurate vital-signs system should generate a more
accurate estimate of the cost per nursing hour, which affects the budgeting
process, because the portion of costs allocated to each service line, ER and
10. ●The overall current system’s OR flexible budget variance ($47,500) is very
large and unfavorable, suggesting that the subvariances (price variance
and efficiency variance) should be calculated.
●The current system’s OR price variance ($40,000) is very large and
unfavorable, suggesting that the nursing hiring manager negotiated a bad
price and that nursing hour pay cuts might be necessary.
●The current system’s OR efficiency variance ($7,500) is moderate and
unfavorable, suggesting that the operating room manager used too many
OR nursing hours for the actual number of surgeries performed.
10. (Continued)
flexible budget variance was zero. Only after continuing on with the analysis
to calculate the price and efficiency variances would Jack realize that the
zero flexible budget variance was the result of two large offsetting variances,
both of which likely require further investigation and attention.
●
Overall, the two cost systems produce different reported costs of the two service
the hospital per OR nursing hour. When used as the standard costs in the
budgeting process, these different reported costs, in turn, lead to very different
flexible budget variances and price and efficiency variances for the OR service
line. Therefore, the managerial accountant should be very careful when
constructing a cost system and be sure that the chosen allocation bases are as
accurate as possible to match the underlying resource consumption patterns of
the business environment. Choosing different cost allocation bases usually will
result in differences in reported service line costliness and various variances,