The purpose of this integrated exercise is to demonstrate how a change in the co

Question

The purpose of this integrated exercise is to

demonstrate how a change in the cost system%u2019s allocation base can

result in significantly different reported

costs for control purposes (e.g., the cost of various

service lines), as well as significantly different budgeted costs for

planning purposes (e.g., flexible

budgets and variance analyses).

The Two Cost Systems

Sacred Heart Hospital (SHH) faces skyrocketing nursing

costs, all of which relate to its two biggest nursing service

lines%u2014the Emergency Room (ER) and the

Operating Room (OR). SHH%u2019s 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.

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 the OR.

3. Using the results from question 2, calculate the

cost per OR nursing hour under the current cost system. After discussion

with several experienced nurses,

Jack Bauer (SHH%u2019s accountant) decided that

assigning nursing costs to the two service lines based on the number of

times that nurses must check

patients%u2019 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 on his computer that

assigns total nursing costs to the ER and OR based on the number of

times nurses check patients%u2019 vital

signs. This system is referred to as the

%u2018%u2018vital-signs costing system.%u2019%u2019 The earlier table

also shows data for vital sign checks for

lines.

4. Using the vital-signs costing system, calculate

the hospital-wide rate based on the number of vital sign checks.

5. Calculate the amount of nursing costs that the

vital-signs costing system assigns to the ER and to the OR.

6. Using the results from question 5, calculate the

cost per OR nursing hour under the vitasigns costing system.

Budgeting and Variance Analysis

In an effort to better plan for and control OR

costs, SHH management asked Jack to calculate he flexible budget

variance (i.e., flexible budget

costs%u2013actual costs) for OR nursing costs,

including the price variance and efficiency variance that make up the

flexible budget variance for OR nursing

costs. 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 system%u2019s 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

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

b. Price variance

c. Efficiency variance

8. 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

b. Price variance

c. Efficiency variance

Discussion of Reported Costs and Variances from the Two Systems

9. Consider SHH%u2019s need to control its

skyrocketing costs, Jack%u2019s 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) would you choose to

implement if you were Jack? Briefly explain the

reasoning behind your choice.

10. What does each of the calculated variances

suggest to Jack regarding actions that he should or should not take with

respect to investigating and improving

each variance? Also, briefly explain why the

variances differ between the two costsystems.

Explanation / Answer

It says that 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

Measure: ER OR Total

# of patients (ER visits or OR surgeries: 1,000 1,000 2,000

So, under the current cost system, the split is 50-50 or $150k each

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.