Standard Costs and Variances

Deciphering Healthcare's Dance: My Journey with Standard Costs and Variances
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August 17, 2023
While common in manufacturing, standard costing, and variance analysis are equally applicable to service industries, notably hospitals. Consider a busy hospital trying to set the expected cost for its range of procedures and services. For example, determining the cost of an MRI scan is not just about the apparent expenses. The technician's time, machinery maintenance, and utility expenses are the cost factors. Similarly, the daily cost of a patient's stay is not just about the bed. It encompasses nursing care, meals, utilities, and other daily resources.
Once these standard costs are established, they serve as benchmarks against actual expenses. Discrepancies between these figures are termed variances. A material variance might arise due to higher usage of surgical supplies or increased purchase costs (Shander et al., 2010).
Labor costs play a significant role in hospital operations. It creates a variance if nurses work beyond their scheduled hours or their wages differ from standard rates. This discrepancy might indicate potential staffing issues or training needs. Indirect costs, or overheads, are equally essential. A higher-than-expected electricity bill, for instance, might prompt a review of operational efficiency or a reconsideration of utility contracts (Hartmann, 1997).
For hospital managers, these variances are not just numbers; they are critical signals that can illuminate areas of concern or opportunities for improv...