In: Accounting
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:
Required:
Prepare a report that shows budgeted and actual costs for the 1,570 patients served during June. Compute the differences (variances) between these amounts and label them as favorable or unfavorable.
On the basis of your answer to requirement (1), determine whether Fall City has any significant problems with respect to clinic supplies and lab tests.
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 the activity level, and think of the cost per test as analogous to the variable overhead rate.)
3-b. Does it appear that Fall City has any significant problems with the cost of its lab tests?
Compare the lab test variance computed in requirement (1), a flexible-budget variance, with the sum of the variances in requirement (3-a). What is the relationship between the flexible budget variance and the total of the individual standard-cost variances?
Solution:
Explanation:1.
Medical assistants: | |
Budget: | 1570 patients × .5 hours ×$17 =$13,345 |
Actual | 830 hours × $17.90 =$14,857 |
Clinic Supplies: | |
Budget: | 1,570 patients × . 5 hours × $13 =$10,205 |
Actual: | $9,850 (given) |
Lab tests: | |
Budget: | 1,570 patients × 3 tests × $66 =$310,860 |
Actual: | $321,222(given) |
Budget :1,570 patients | Actual: 1,570 patients | Variance | ||
Medical assistants | $13,345 | $14,857 | $,1512 | UF |
Clinic supplies | $10,205 | $9,850 | $355 | F |
Lab tests | $310,860 | $321,222 | $10,362 | UF |
Total | $334,410 | $345,929 | $11,519 | UF |
2.) No
The variance do not reveal any significant problems. The $355 variance for clinic supplies is only 3.48% of the budgeted amount ($355 / $10,205) and favorable. Similarly, the lab tests variance, while unfavorable, is only 3.3% of the budgeted amount ($10,362 / 310,860)
3a.)
Variance for lab tests:
Spending variance: | |
Actual tests conducted × actual costs tests (5,181 tests × $62) | $321,222 |
Actual cost conducted × standard cost (5,181 tests ×$66) | $341,946 |
Variable overhead spending variance | $20,724 F |
* 1,570 patients × 3.3 tests =5,181tests
$321,222 / 5,181 tests =$62
Efficiency variance | |
Actual tests conducted × Standard cost tests (5,181 tests × $66) | $341,946 |
Standard tests allowed × $tandard cost(4,710 ×$66) | $310,860 |
Variable overhead efficiency variance | $31,086 UF |
*1570 patients × 3 tests
=$4,710
b.)
Yes, Fall city does appear to have some problems. The two variance computed are fairly sizeable relation to the $310,860 budget. The efficiency variance is of particular concern, given that it is 10% of budget (31,086 / 310,860) and unfavorable.
4.)
Yes
The spending variance and efficiency variance add up to equal the flexible budget variance ($20,724 F + $31,086 UF =$10,860 U). The flexible budget variance reflects the total of the individual standard cost variance.