MHA 706 FINAL EXAM QUESTIONS AND CORRECT ANSWERS
The exam covers variance analysis (Volume Variance = Flexible Revenues – Static
Revenues; Management Variance = Flexible Costs – Actual Costs), cost allocation
(cost pools divided by cost drivers give allocation rates; overhead departments are
cost centers, patient departments are revenue centers), and capital budgeting
(decisions involve large sums, are costly to reverse, and define strategy). It tests
bond concepts (long-term bonds have high price risk but low reinvestment risk; YTM
discounts cash flows to equal bond price), stock valuation (constant growth model P0
= D1/(Re – g); dividends grow via inflation and earnings retention), and budgeting
(static vs. flexible budgets; variance analysis identifies problem areas). Key
true/false items include that allocation does not reduce total expenses, nothing is
riskless, and NPV measures excess value contribution to the business.
Volume Variance - ANS ... Flexible Revenues - Static Revenues
Rationale: Volume variance isolates the impact of changes in patient volume from
changes in price or efficiency. Flexible revenues represent what should have been
earned at actual volume, while static revenues represent what was planned at
budgeted volume, making their difference purely volume-driven.
Management Variance - ANS ... Flexible Costs - Actual Costs
Rationale: Also called efficiency variance, this measures how well management
controlled costs after adjusting for volume. If actual costs exceed flexible costs, the
variance is unfavorable, indicating inefficiency.
Supplies Variance - ANS ... Flexible Supplies Cost - Actual Supplies Cost
Rationale: Supplies are a variable cost. This variance shows whether the
department used more or fewer supply units than expected for the actual volume or
paid higher or lower prices per unit.
Labor Variance - ANS ... Flexible Labor Cost - Actual Labor Cost
Rationale: Similar to supplies variance, this isolates labor efficiency differences in
hours used and rate differences in wages per hour after adjusting for actual patient
volume.
, Variance analysis is an attempt to better explain and understand differences in
expected performance and actual performance. - ANS ... True
Rationale: This is the core definition of variance analysis, which breaks the gap
between budget and actual into volume, price, efficiency, and management
components.
Capital budgeting decisions are ..... - ANS ... the acquisition of land, buildings and
equipment, very important managerial decisions, can involve large sums of money,
are costly to reverse, define the strategic direction of the business
Rationale: Capital budgeting involves long-term asset purchases that are
irreversible, strategic, large-dollar, and shape the organization's future capacity.
Indirect Costs - ANS ... Are costs associated with shared resources used by the entire
organization
Rationale: Examples include utilities, administration, and housekeeping. These costs
cannot be easily traced to one specific patient department.
Cost Driver - ANS ... Is the basis on which the cost pool will be allocated
Rationale: Examples include patient days, square footage, and labor hours. The
cost driver is the "cause" of the cost being allocated.
Cost Pool - ANS ... Is the overhead amount to be allocated
Rationale: The cost pool represents the total dollars from support departments, such
as $500,000 for facilities costs, waiting to be distributed to revenue centers.
Overhead departments - ANS ... Are often called costs centers
Rationale: Overhead departments such as HR, IT, and maintenance do not directly
generate revenue, which is why they are labeled as cost centers.
Patient Service Departments - ANS ... Are often called revenue centers
Rationale: Departments like cardiology, surgery, and radiology bill directly for
patient care, making them revenue centers.
Direct Costs - ANS ... Are costs unique and exclusive to a department
Rationale: An example is nursing salaries in the ICU, which can be easily and
accurately traced to that specific department.
When you divide the "Dollars in the Cost Pool" by "Total Volume of Cost Driver" -
you have determined .... - ANS ... The Allocation Rate
Rationale: The formula is Allocation Rate equals Cost Pool divided by Total Cost
Driver Volume. For example, $100,000 in facilities cost divided by 10,000 square
feet equals $10 per square foot.
The exam covers variance analysis (Volume Variance = Flexible Revenues – Static
Revenues; Management Variance = Flexible Costs – Actual Costs), cost allocation
(cost pools divided by cost drivers give allocation rates; overhead departments are
cost centers, patient departments are revenue centers), and capital budgeting
(decisions involve large sums, are costly to reverse, and define strategy). It tests
bond concepts (long-term bonds have high price risk but low reinvestment risk; YTM
discounts cash flows to equal bond price), stock valuation (constant growth model P0
= D1/(Re – g); dividends grow via inflation and earnings retention), and budgeting
(static vs. flexible budgets; variance analysis identifies problem areas). Key
true/false items include that allocation does not reduce total expenses, nothing is
riskless, and NPV measures excess value contribution to the business.
Volume Variance - ANS ... Flexible Revenues - Static Revenues
Rationale: Volume variance isolates the impact of changes in patient volume from
changes in price or efficiency. Flexible revenues represent what should have been
earned at actual volume, while static revenues represent what was planned at
budgeted volume, making their difference purely volume-driven.
Management Variance - ANS ... Flexible Costs - Actual Costs
Rationale: Also called efficiency variance, this measures how well management
controlled costs after adjusting for volume. If actual costs exceed flexible costs, the
variance is unfavorable, indicating inefficiency.
Supplies Variance - ANS ... Flexible Supplies Cost - Actual Supplies Cost
Rationale: Supplies are a variable cost. This variance shows whether the
department used more or fewer supply units than expected for the actual volume or
paid higher or lower prices per unit.
Labor Variance - ANS ... Flexible Labor Cost - Actual Labor Cost
Rationale: Similar to supplies variance, this isolates labor efficiency differences in
hours used and rate differences in wages per hour after adjusting for actual patient
volume.
, Variance analysis is an attempt to better explain and understand differences in
expected performance and actual performance. - ANS ... True
Rationale: This is the core definition of variance analysis, which breaks the gap
between budget and actual into volume, price, efficiency, and management
components.
Capital budgeting decisions are ..... - ANS ... the acquisition of land, buildings and
equipment, very important managerial decisions, can involve large sums of money,
are costly to reverse, define the strategic direction of the business
Rationale: Capital budgeting involves long-term asset purchases that are
irreversible, strategic, large-dollar, and shape the organization's future capacity.
Indirect Costs - ANS ... Are costs associated with shared resources used by the entire
organization
Rationale: Examples include utilities, administration, and housekeeping. These costs
cannot be easily traced to one specific patient department.
Cost Driver - ANS ... Is the basis on which the cost pool will be allocated
Rationale: Examples include patient days, square footage, and labor hours. The
cost driver is the "cause" of the cost being allocated.
Cost Pool - ANS ... Is the overhead amount to be allocated
Rationale: The cost pool represents the total dollars from support departments, such
as $500,000 for facilities costs, waiting to be distributed to revenue centers.
Overhead departments - ANS ... Are often called costs centers
Rationale: Overhead departments such as HR, IT, and maintenance do not directly
generate revenue, which is why they are labeled as cost centers.
Patient Service Departments - ANS ... Are often called revenue centers
Rationale: Departments like cardiology, surgery, and radiology bill directly for
patient care, making them revenue centers.
Direct Costs - ANS ... Are costs unique and exclusive to a department
Rationale: An example is nursing salaries in the ICU, which can be easily and
accurately traced to that specific department.
When you divide the "Dollars in the Cost Pool" by "Total Volume of Cost Driver" -
you have determined .... - ANS ... The Allocation Rate
Rationale: The formula is Allocation Rate equals Cost Pool divided by Total Cost
Driver Volume. For example, $100,000 in facilities cost divided by 10,000 square
feet equals $10 per square foot.
