The St. Xavier Healing Touch Hospital Case Solution
Question 1: Variance Analysis
A: The variance analysis over revenue and expenses, indicates that St. Xavier Healing Touch Hospital expected more revenue from its operation, but the actual results were not in the company’s favor. It could be possible that St. Xavier Healing Touch Hospital took inappropriate assumptions while making the budgets for revenue or expense.
The outcomes indicate that the high revenue variance was due to the inappropriate budget of the insurance reimbursement. It could be possible that the insurance segment of the company did not operate effectively. Furthermore, on the side of consultant fees; the company expected less but in actual it could demand for more fees, which would increase the overall operational cost.
- The quantity variance of doctors’ salaries, indicates towards unfavorable outcome for the St. Xavier Healing Touch Hospital. It could be possible that the hospital recruits unskilled doctor, which leads towards inefficiency in its operations. Therefore, additional doctors are required by the hospital; whereas, the revenues are declining.
On the other hand, the price variance of doctors’ salaries, indicates to unfavorable variance, which could be due to the hospital’s inefficient negotiation with the doctors over their costing.Differences in the quantity supplied is not favorable to the hospital, as it might lead towards an excessive stock.
Whereas, the price variance of supplies, provides heavy favorable outcome for the hospital. This influence is due to the weak market conditions, as indicated in the case. In addition to this, better procurement options available to the hospital, might result in favorable variance.
- Changes in the patients’ fees is favorable to the hospital, which could be due to more patients in the hospital. The promotional strategy looks quite worthy for the hospital. On the other hand,the price differences not favorable for the hospital, as it might take place due to the reduction in the prices, by the management.
Overall, the revenue from reimbursement reduced due to the heavy reduction in reimbursement per patient. As a result,there was huge difference in the price; however, the company has different types of insurance.
- D. The variance analysis indicates that the hospital’s performance is not good, and it is consequently losing its funds. Majority differences appear to be unfavorable to the company; however, it can be argued that the management has failed in formulating an appropriate budget, but in addition it lacks the ability to limit the expenditures and to stay in the budget.
The most severe problem faced by the company is due to the heavy reduction in its insurance reimbursement per patient. This could lead towards working capital problems and the hospital would be required to raise short term financing. (Unknown, 2020)
Question 2: Activity Based Costing
- Cost driver is an essential cause of the occurrence of cost. It could be possible that there are multiple cost driver, which tend to lead towards an increase in the cost. For the allocation of overheads in manufacturing; the company’s production overheads are allocated on the basis of machine hours.
In the case of Healing Touch hospital; the most appropriate cost driver is likely to be staff hours for the allocation of overheads to the various departments. Staff hours should be allocated as per the overheads as compared to the number of patients and supplies per procedure. An increase in the number of patients will not result in an increased overheads of the company, while the additional staff hours would lead to the enhancement in the overheads
- After considering staff hours as a cost driver for the allocation of overheads over the sections;the total cost for the three activities is computed, which indicates to the higher allocation of overheads received by the X-ray activity, followed by MRI and CT scan. However, the cost per procedure calculation determines that CT scan has the highest cost per procedure, whereas MRI and X-ray have lower cost per procedure.
- The MRI and CT scan activities are not covering their overheads and have resulted in loss for the hospital. However, X-ray appears to be profitable for the hospital, as per procedure generated by the X-ray is around $47. The hospital is losing $11,000 annually, due to the loss of making activities of MRI and CT scan. Therefore, progress with these activates is not in the favor of the hospital, as these are not commercially viable…………………
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