Question

In: Accounting

Fall City Hospital has an outpatient clinic. Jeffrey Harper, the hospital’s chief administrator, is very concerned...

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 $17 per hour, and each assistant is expected to spend 30 minutes with a patient. Assistants totaled 830 hours in helping the 1,570 patients seen, at an average pay rate of $17.90 per hour.
  • Clinic supplies The cost of clinic supplies used is budgeted at $13 per labor hour, and the actual cost of supplies used was $9,850.
  • Lab tests Each patient is anticipated to have three lab tests, at an average budgeted cost of $66 per test. Actual lab tests for June cost $321,222 and averaged 3.3 per patient.

  

Required:

  1. 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.

  2. 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.

  1. 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.)

  2. 3-b. Does it appear that Fall City has any significant problems with the cost of its lab tests?

  1. 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?

Solutions

Expert Solution

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.


Related Solutions

Fall City Hospital has an outpatient clinic. Jeffrey Harper, the hospital’s chief administrator, is very concerned...
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...
Fall City Hospital has an outpatient clinic. Jeffrey Harper, the hospital’s chief administrator, is very concerned...
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...
Fall City Hospital has an outpatient clinic. Jeffrey Harper, the hospital’s chief administrator, is very concerned...
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...
Fall City Hospital has an outpatient clinic. Jeffrey Harper, the hospital’s chief administrator, is very concerned...
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...
Fall City Hospital has an outpatient clinic. Jeffrey Harper, the hospital’s chief administrator, is very concerned...
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...
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in...
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in the hospital’s lab. Charges for lab tests are consistently higher at Valley View than at other hospitals and have resulted in many complaints. Also, because of strict regulations on amounts reimbursed for lab tests, payments received from insurance companies and governmental units have not been high enough to cover lab costs. Mr. Fleming has asked you to evaluate costs in the hospital’s lab for...
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in...
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in the hospital’s lab. Charges for lab tests are consistently higher at Valley View than at other hospitals and have resulted in many complaints. Also, because of strict regulations on amounts reimbursed for lab tests, payments received from insurance companies and governmental units have not been high enough to cover lab costs. Mr. Fleming has asked you to evaluate costs in the hospital’s lab for...
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in...
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in the hospital’s lab. Charges for lab tests are consistently higher at Valley View than at other hospitals and have resulted in many complaints. Also, because of strict regulations on amounts reimbursed for lab tests, payments received from insurance companies and governmental units have not been high enough to cover lab costs. Mr. Fleming has asked you to evaluate costs in the hospital’s lab for...
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in...
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in the hospital’s lab. Charges for lab tests are consistently higher at Valley View than at other hospitals and have resulted in many complaints. Also, because of strict regulations on amounts reimbursed for lab tests, payments received from insurance companies and governmental units have not been high enough to cover lab costs. Mr. Fleming has asked you to evaluate costs in the hospital’s lab for...
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in...
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in the hospital’s lab. Charges for lab tests are consistently higher at Valley View than at other hospitals and have resulted in many complaints. Also, because of strict regulations on amounts reimbursed for lab tests, payments received from insurance companies and governmental units have not been high enough to cover lab costs. Mr. Fleming has asked you to evaluate costs in the hospital’s lab for...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT