Saturday, 26 October 2013

Fall City Hospital has an outpatient clinic. Jeffrey Harper, the hospital’s chief administrator, is very concerned about cost control and has asked that performance reports be prepared that compare budgeted and actual amounts for medical assistants, clinic supplies, and lab tests. Past financial studies have shown that the cost of clinic supplies used is driven by the number of medical assistant labor hours worked, whereas lab tests are highly correlated with the number of patients served.

Fall City Hospital has an outpatient clinic. Jeffrey Harper, the hospital’s chief administrator, is very concerned about cost control and has asked that performance reports be prepared that compare budgeted and actual amounts for medical assistants, clinic supplies, and lab tests. Past financial studies have shown that the cost of clinic supplies used is driven by the number of medical assistant labor hours worked, whereas lab tests are highly correlated with the number of patients served.
     The following information is available for June:
  
Medical assistants Fall City’s standard wage rate is $16 per hour, and each assistant is expected to spend 30 minutes with a patient. Assistants totaled 820 hours in helping the 1,590 patients seen, at an average pay rate of $17.50 per hour.
Clinic supplies The cost of clinic supplies used is budgeted at $12 per labor hour, and the actual cost of supplies used was $9,150.
Lab tests Each patient is anticipated to have four lab tests, at an average budgeted cost of $67 per test. Actual lab tests for June cost $440,748 and averaged 4.4 per patient.
  
Required:
1.
Prepare a report that shows budgeted and actual costs for the 1,590 patients served during June. Compute the differences (variances) between these amounts and label them as favorable or unfavorable. (Indicate the effect of each variance by selecting "Favorable", "Unfavorable", and "None" for no effect (i.e., zero variance). Input all amounts as positive values. Do not round your intermediate calculations. Omit the "$" sign in your response.)
  
  Budget:
1,590 Patients
Actual:
1,590 Patients
Variance
  Medical assistants $     $     $    Unfavorable
  Clinic supplies            Favorable
  Lab tests            Unfavorable
  


 
      Total $     $     $    Unfavorable
  





 

  
2. On the basis of your answer to requirement (1), state whether the hospital has any significant problems with respect to clinic supplies and lab tests.
    
  No
  
3-a.
Determine the spending and efficiency variances for lab tests. (Hint: In applying the overhead variance formulas, think of the number of tests as analogous to the number of hours, and think of the cost per test as analogous to the variable overhead rate.) (Indicate the effect of each variance by selecting "Favorable", "Unfavorable", and "None" for no effect (i.e., zero variance). Do not round your intermediate calculations. Input all amounts as positive values. Omit the "$" sign in your response.)
  
      
  Variable-overhead spending variance $    Favorable
  Variable-overhead efficiency variance $    Unfavorable

  
3-b. Does it appear that Fall City has any significant problems with the cost of its lab tests?
    
  Yes
  
4. Compare the lab test variance computed in requirement (1), a flexible-budget variance with the sum of the variances is requirement (3-a ) and state whether the flexible-budget variance reflects the total of the individual standard-cost variance.
    
  Yes


Explanation: 1.
Calculations:
   Medical assistants:
             Budget: 1,590 patients × .5 hours × $16 = $12,720
             Actual: 820 hours × $17.5 = $14,350
  Clinic supplies:
            Budget: 1,590 patients × .5 hours × $12 = $9,540
            Actual: $9,150 (given)
  Lab tests:
            Budget: 1,590 patients × 4 tests × $67 = $426,120
            Actual: $440,748 (given)

2.
The variances do not reveal any significant problems. The $390 variance for clinic supplies is only 4.09% of the budgeted amount ($390 ÷ $9,540) and favorable. Similarly, the lab-test variance, while unfavorable, is only 3.43% of the budget ($14,628 ÷ $426,120).

3.
Variances for lab tests:
 Spending variance:      
     Actual tests conducted × actual cost 6,996 tests* × $63** $ 440,748  
     Actual tests conducted × standard cost 6,996 tests × $67   468,732  
         


     Variable-overhead spending variance $ 27,984  F
 







*  1,590 patients × 4.4 tests
** $440,748 ÷ 6,996 tests
  Efficiency variance:      
  Actual tests conducted × standard cost 6,996 tests × $67 $ 468,732  
  Standard tests allowed × standard cost 6,360 tests* × $67   426,120  
         


  Variable-overhead efficiency (quantity) variance $ 42,612  U
         






* 1,590 patients × 4 tests
 
Yes, Fall City does appear to have some problems. The two variances computed are fairly sizable in relation to the $426,120 budget. The efficiency variance is of particular concern, given that it is 10.00% of budget ($42,612 ÷ $426,120) and unfavorable. This variance arises because the assistants are conducting an average of 4.4 tests per patient when the standard calls for only 4 tests. The standard may be set too low or perhaps the assistants are somewhat sloppy, having to re-do tests that were done improperly.
 
The administration should also investigate the causes of the $4 decline in the cost per test, from the standard cost of $67 to the actual cost of $63.

4.
The spending and efficiency variances add up to equal the flexible-budget variance ($27,984F + $42,612U = $14,628U). The flexible-budget variance reflects the total of the individual standard-cost variances.