Question

Unit Costs, Multiple Products, Variance Analysis, Service Setting

Objective 1, 3

The maternity wing of the city hospital has two types of patients: normal and cesarean. The standard quantities of labor and materials per delivery for 20X1 are:

	Normal	Cesarean
Direct materials (lbs.)	9.0		21.0
Nursing labor (hrs.)	2.5		5.0

The standard price paid per pound of direct materials is $10.00. The standard rate for labor is $16.00. Overhead is applied on the basis of direct labor hours. The variable overhead rate for maternity is $30.00 per hour, and the fixed overhead rate is $40.00 per hour.

Actual operating data for 20X1 are as follows:

1. Deliveries produced: normal, 4,000; cesarean, 8,000.

2. Direct materials purchased and used: 200,000 pounds at $9.50—35,000 for normal maternity patients and 165,000 for the cesarean patients; no beginning or ending raw materials inventories.

3. Nursing labor: 50,700 hours—10,200 hours for normal patients and 40,500 hours for the cesarean; total cost of labor, $580,350.

Required:

1. Prepare a standard cost sheet showing the unit cost per delivery for each type of patient.

   Answer

2. Compute the materials price and usage variances for each type of patient.

   Answer

3. Compute the labor rate and efficiency variances for each type of patient.

   Answer

4. Conceptual Connection Assume that you know only the total direct materials used for both products and the total direct labor hours used for both products. Can you compute the total materials usage and labor efficiency variances? Explain.

   Answer

5. Conceptual Connection Standard costing concepts have been applied in the healthcare industry. For example, diagnostic-related groups (DRGs) are used for prospective payments for Medicare patients. Select a search engine (such as Yahoo! or Google), and conduct a search to see what information you can obtain about DRGs. You might try “Medicare DRGs” as a possible search topic. Write a memo that answers the following questions:

   • What is a DRG?

   • How are DRGs established?

   • How many DRGs are used?

   • How does the DRG concept relate to standard costing concepts discussed in the chapter? Can hospitals use DRGs to control their costs? Explain.

Answer 1

As per policy, only four parts of a question are allowed to answer at a time, so answering first four parts here:

Standard cost sheet:
	Normal	Cesarean
Dir Mat.	90	210		9*10	21*10
Dir Lab.	40	80		2.5*16	5*16
Overhead:
Variable	75	150		2.5*30	5*30
Fixed	100	200		2.5*40	5*40
Unit cost per patient	305	640
Mat. Price variance = (actual price - std. price) * actual usage
Normal = (9.5 - 10)*35000 = 17500 F
Cesarean = (9.5 - 10)*165000 = 82500 F
mat. Usage variance = (Std usage for actual o/p - Actual usage)* Std. price
Normal = (4000*9 - 35000)*10 = 10000 F
Cesarean = (8000*21 - 165000)*10 = 30000 F
Lab. Rate variance = (actual rate - std. rate) * actual hours
Normal = (580350/50700 - 16)*10200 = 46443 F
Cesarean = (580350/50700 - 16)*40500 = 184407 F
Lab. Efficiency variance = (Std hours for actual o/p - Actual hours)* Std. rate
Normal = (4000*2.5 - 10200)*16 = 3200 U
Cesarean = (8000*5 - 40500)*16 = 8000 U
Total Mat. Usage variance = Normal + Cesarean = (10000 + 30000) F = 40000 F
explanation:
Total mat. Used - total mat. Cost at std = (200000*9.5) - (4000*9*10 + 8000*21*10) = 140000 F
Total Mat. Usage variance = 140000 F - Total Mat. Price variance = 140000 F - (17500+82500)F = 40000F
Total Lab. Efficiency variance = Normal + Cesarean = (3200 + 8000) U = 11200 U
explanation:
Total lab. Used - total lab. Cost at std = 580350 - (4000*2.5*16 + 8000*5*16) = 219650 F
Total Lab. Efficiency variance = 219650 F - Total lab. rate variance = 219650 F - (46443+184407)F = 11200 U