HOMEWORK
Two general types of approaches to internal control are preventive and detection approaches. Preventive approaches stress the elimination of problems, whereas detection approaches stress the early recognition and correction of problems.
1. What sorts of things could you do if you used a preventive approach to reduce costs?
2. What is a coefficient of variation, and how can that information be used in budgeting?
3. Which would you investigate first-a budget variance that is 1.0 standard deviation away from the expected value or one that is 1.5 standard deviations away from the value? Why?
4. When is the use of a flexible budget likely to be most effective?
5. Standard cost accounting systems often separate variance into price and efficiency components. Why?
6. Ned Zechman is the dietary manager of a large convalescent center. He is disturbed by variances, all highly unfavorable, in his food budget for the past 3 months. Ned has been reducing both the quantity and quality of delivered meals, but to date there has been no reflection of this in his monthly budget variance report. A recent organizational change brought in Pat Schumaker, who is now responsible for all purchasing activity, including dietary. All purchased food costs are charged to dietary at the time of purchase. What do you believe might explain Ned's problem, and how would you determine the cause?
7. Assume that the budgeted cost for a department is $10,000 per week and the standard deviation is $500. The decision to investigate a variance requires a comparison of expected benefits with expected costs. Suppose an unfavorable variance of $1,000 is observed. The normal distribution indicates the probability of observing this variance is 0.0228 if the system is in control. Furthermore, assume that the benefits would be 50% of the variance and that investigation costs are $200. Should this variance be investigated? Assume that the variance is still $1,000, but it is favorable. Should it still be investigated?
8. Departmental costs may be out of control if either the variance is outside specified limits or the number of successive observations, above or below expected costs, is excessive. The binomial distribution can be used as a basis for determining what is or is not excessive. If we assume that the probability of being either above or below budgeted costs is 0.50, then the probability of n successive observations of actual costs being greater than budgeted costs is 0.50n. What is the probability of observing six successive periods in which actual costs are greater than budgeted costs?
9. You are evaluating the performance of the radiology department manager. The service unit or output for this department is the number of procedures. A static budget was prepared at the beginning of the year. You are now examining that budget in relation to actual experience. The relevant data are included in Table 17-18. Table 17-18Radiology Department Data Actual Original Budget Variance Procedures 100,000 120,000 20,000 (Unfavorable) Variable costs $1,200,000 $1,320,000 $120,000 (Favorable) Fixed costs 600,000 600,000 - Total costs $1,800,000 $1,920,000 $120,000 (Favorable) Average Cost per Unit $18.00 $16.00 Variable Cost per Unit $12.00 $11.00 Fixed Cost per Unit $6.00 $5.00 The department manager is pleased because he has a favorable $120,000 cost variance. Evaluate the effectiveness claims of the manager using the budgetary variance model described in this chapter.
10. The data in Table 17-19 were assembled for a laundry department during the period from 2010 to 2011. Break down the total change in cost, which is $7,422 ($86,378 less $78,956) into the variance categories described in this chapter, that is, price, efficiency, intensity volume, and pure volume variances.
Cleverley, W. O. Essentials of Health Care Finance. [Ashford University].
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