Cornerstones of Managerial Accounting 4th Edition by Maryanne Mowen, Don Hansen, Dan Heitger

Exercise 76

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 2011 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 2011 are as follows:
a. Deliveries produced: normal, 4,000; cesarean, 8,000.
b. 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.
c. 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.
2. Compute the materials price and usage variances for each type of patient.
3. Compute the labor rate and efficiency variances.
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.
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:
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.