UNIT COSTS, MULTIPLE PRODUCTS, VARIANCE ANALYSIS, SERVICE SETTING

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 2009 are:

The standard price paid per pound of direct materials is $10. The standard rate for labor is $16. Overhead is applied on the basis of direct labor hours. The variable overhead rate for maternity is $30 per hour, and the fixed overhead rate is $40 per hour.

Actual operating data for 2009 are as follows:

a. Patient days produced: normal, 3,500; cesarean, 7,000.

b. Direct materials purchased and used: 172,000 pounds at $9.50-30,000 for normal maternity patients and 142,000 for the cesarean patients; no beginning or ending raw materials inventories.

c. Nursing labor: 36,500 hours-7,200 hours for normal patients and 29,300 hours for the cesarean; total cost of labor, $580,350.

Required:

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

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

3. Compute the labor rate and efficiency variances.

4. 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.

5. Standard costing concepts have been applied in the healthcare industry. For exam- ple, diagnostic-related groups (DRGs) are used for prospective payments for Medi- care 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 ''Medi- care DRGs'' as a possible search topic. Write a memo that answers the following questions:

a. What is a DRG?

b. How are DRGs established?

c. How many DRGs are used?

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