Question

Valley Hospital began using standards to evaluate its Admissions Department. The standard was broken into two types of admissions as follows:

Type of Admission	Standard Time to Complete Admission Record
Unscheduled	30 min.
Scheduled	15 min.

The unscheduled admission took longer because name, address, and insurance information needed to be determined and verified at the time of admission. Information was collected on scheduled admissions prior to admitting the patient, thus requiring less time in admissions.

The Admissions Department employs four full-time people for 40 hours per week at $15 per hour. For the most recent week, the department handled 140 unscheduled and 340 scheduled admissions.

The answers to the bulleted questions are below the last three numbered questions.

• How much was actually spent on labor for the week?
• What are the standard hours for the actual volume of work for the week?
• Compute the direct labor time variance, and report how well the department performed for the week.

Using the information below discuss the following:

1. What are some factors that may cause an unfavorable direct labor time variance for the Admissions Department?
2. Who generally has control over the direct labor cost variances?
3. Payroll and/or wages are generally the largest expense for an organization, if this unfavorable labor variance continues, as a financial advisor, what would you advise?

Labor cost

Number of employees		4
Hours per week		× 40
Total actual hours for the week		160
Labor rate per hour		× $15
Actual staff cost		$2,400

Standard and actual hours volume

		Unscheduled		Scheduled		Total
Standard time (in minutes)		30		15
Number of admissions		× 140		× 340
Total minutes		4,200		5,100		9,300
Divide by 60 min.		÷ 60 min.		÷ 60 min.		÷ 60 min.
Number of standard hours		70		85		155

Direct Labor Variance

Direct Labor Time Variance		=		(Actual Staff Hours – Standard Staff Hours) × Standard Rate per Hour
		=		(160 hrs. – 155 hrs.) × $15 per hour
		=		$75 Unfavorable

Answer 1

Part 1)

The amount that was actually spent on labor for the week is calculated as below:

Amount Actually Spent on Labor for the Week = Number of Full-Time Employees*Number of Hours Per Week*Rate Per Hour

Substituting values in the above formula, we get,

Amount Actually Spent on Labor for the Week = 4*40*15 = $2,400

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Part 2)

The value of standard hours for the actual volume of work for the week is determined as follows:

Standard Hours for the Actual Volume of Work for the Week = Number of Unscheduled Admissions*Standard Time for Unscheduled Admissions/60 + Number of Scheduled Admissions*Standard Time for Scheduled Admissions/60

Substituting values in the above formula, we get,

Standard Hours for the Actual Volume of Work for the Week = 140*30/60 + 340*15/60 = 155 hours

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Part 3)

The direct labor time variance is calculated as below:

Direct Labor Time Variance = Standard Rate Per Hour*(Actual Hours - Standard Hours for Actual Volume of Work)

Substituting values in the above formula, we get,

Direct Labor Time Variance = 15*(4*40 - 155) = $75 (Unfavorable)

Based on the above calculations, it can be concluded that the Admissions department was less efficient during the week. It is because the number of actual hours exceeded the standard hours that should have been used to handle the admissions during the week by 5 hours (160-155).

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Part 4)

The factors that may cause an unfavorable direct labor time variance for the Admissions Department are given below:

1) Use of less experienced/trained staff to handle the admissions.

Lesser experience or lack of appropriate training would result in more time being spent on the same activity which in turn would increase the handling time. This factor could have caused the actual hours to be higher than the standard hours for the volume of work that was handled by the admissions department.

2) Unscheduled admissions turned out be higher as compared to estimates.

It is clear from the details provided in the question that the time taken to handle an unscheduled admission (30 minutes) is double the time required to handle a scheduled admission (15 minutes). An increase in the number of unscheduled admissions would cause an increase in the time to be spent on such admissions.

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Part 5)

Production supervisors, that is, supervisors/managers who handle the production process are responsible for the direct labor cost variances. It is because, production supervisors are responsible for scheduling the work and assigning the workers/staff to the production process. They are also required to hire appropriate staff (capable of handling and executing the work) and train them (as and when there is a need). Further, they need to ensure that the employees are assigned work according to their skills, knowledge and capability. For instance, a highly skilled employee should not be given the work that can be handled by a semi-skilled worker as it would result in an increase in overall direct labor costs.

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Part 6)

As a financial manager, I would first try to identify the exact cause (s) of the variance (s). If the direct labor time variance is on account of lack of trained staff, I would first arrange proper training for the staff. If the staff is not experienced, I would try to hire people with more experience in handling the relevant process. If highly skilled workers are being improperly used for handling the basic production process, I would reassign them to some other processes (such as performing quality checks, identifying process improvement areas/opportunities, etc.) which in turn would help in reducing/eliminating the amount of time spent on non-value adding activities, thereby, resulting in overall cost savings.

If the higher direct labor cost is on account of fixed wages, I would try to hire contractual employees (who will have fixed period contracts with the organization or who will work as per the needs of the organization). I would incorporate a variable pay structure where the compensation would be linked to the performance. I would also review the budgets on a periodic basis and try to identify and correct the causes/errors/mistakes that resulted in deviations/variances from the acceptable level of performance.