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

The purpose of this integrated exercise is to demonstrate how a change in the cost system€™s 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€”the 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.

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€™s 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 on his computer 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 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€“actual 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€™s 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€™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) 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.

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Chapters Objectives Cornerstones 7-1 7-2 7-4 9-1 10-1 10-3 10-4 10-5 7-2 7-3 10-1 10-3 10-4 10-5 10-6 10 Measure OR Total ER 1,000 2,000 Number of patients (ER visits or OR 1,000 2,000 surgeries) Number of vital signs checks Number of nursing hours 4,000 5,000 6,000 15,000 10,000