John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in the hospital’s lab. Charges for lab tests are consistently higher at Valley View than at other hospitals and have resulted in many complaints. Also, because of strict regulations on amounts reimbursed for lab tests, payments received from insurance companies and governmental units have not been high enough to cover lab costs.
Mr. Fleming has asked you to evaluate costs in the hospital’s lab for the past month. The following information is available:
Small glass plates are used in both types of tests. During the past month, the hospital purchased 21,000 plates at a cost of $71,820. 3,200 of these plates were unused at the end of the month; no plates were on hand at the beginning of the month.
During the past month, 3,200 hours of labor time were recorded in the lab at a cost of $36,480.
The lab’s variable overhead cost last month totaled $28,160.
Valley View Hospital has never used standard costs. By searching industry literature, however, you have determined the following nationwide averages for hospital labs:
Plates: Three plates are required per lab test. These plates cost $3.60 each and are disposed of after the test is completed.
Labor: Each blood test should require 0.8 hours to complete, and each smear should require 0.40 hours to complete. The average cost of this lab time is $12.40 per hour.
Overhead: Overhead cost is based on direct labor-hours. The average rate for variable overhead is $8.30 per hour.
Required:
1. Compute a materials price variance for the plates purchased last month and a materials quantity variance for the plates used last month.
2. For labor cost in the lab:
a. Compute a labor rate variance and a labor efficiency variance.
b. In most hospitals, one-half of the workers in the lab are senior technicians and one-half are assistants. In an effort to reduce costs, Valley View Hospital employs only one-fourth senior technicians and three-fourths assistants. Would you recommend that this policy be continued?
3-a. Compute the variable overhead rate and efficiency variances.
3-b. Is there any relation between the variable overhead efficiency variance and the labor efficiency variance?
1. Material Variances
a) Material Price Variance = (Industry Average Price - Actual price) * Actual Quantity purchased
= [ $ 3.60 - ($ 71,820 / 21,000)] * 21,000 Units
= [ $ 3.60 - $ 3.42 ] * 21,000 Units
= $ 3,780 (Favourable)
b) Materials Quantity Variance = (Standard Quantity consumed for actual tests - Actual Quantity consumed) * Industry Average Price
= [(3 Units * 5,600 Tests) - (21,000 Units - 3,200 Units)] * $ 3.60
= [ 16,800 Units - 17,800 Units] * $ 3.60
= - $ 3,600 (Unfavourable)
2. Labour Variances
a) (i) Labour Rate Variance = (Standard Rate - Actual Rate) * Actual Hours Worked
= [$ 12.40 - ( $ 36,480 / 3,200 Hours)] * 3,200 Hours
= [ $ 12.40 - $ 11.40] * 3,200 Hours
= $ 3,200 (Favourable)
a) (ii) Labour Efficiency Variance = ( Standard hours allowed for actual tests - Actual hours) * Standard Rate
= [ (1,400 blood Tests * 0.8 Hours) + (4,200 Smears * 0.4 Hours) - 3,200 Hours] * $ 12.40
= [ 1,120 Hours + 1,680 Hours - 3,200 Hours] * $ 12.40
= - $ 4,960 (Unfavourable)
b) The existing policy of Valley View hospital should be discontinued as though the average hourly rate is less than the industry average, but the overall labour efficiency is very less in comparison to industry average. As a result the net Labour cost of Valley View hospital is high as compared to industry average, as computed below:-
Total Labour cost of Valley view hospital = $ 36,480
Total Labour cost as per industry average should have been = (2,800 Hours * $ 12.40) = $ 34,720
Net Excess cost incurred by Valley View hospital = $ 36,480 - $ 34,720 = $ 1,760
3. Overheads variances
a) (i) Variable Overhead Rate Variance = (Actual Hours * standard Rate) - Actual variable overheads
= (3,200 Hours * $ 8.30/Hour) - $ 28,160
= - $ 1,600 (Unfavourable)
a) (ii) Variable overhead Efficiency Variance = (Standard Hours allowed * Standard Rate) - (Actual Hours * Standard Rate)
= (2,800 Hours * $ 8.30/Hour) - (3,200 Hours * $ 8.30/Hour)
= - $ 3,320 (Unfavourable)
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in...
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in the hospital’s lab. Charges for lab tests are consistently higher at Valley View than at other hospitals and have resulted in many complaints. Also, because of strict regulations on amounts reimbursed for lab tests, payments received from insurance companies and governmental units have not been high enough to cover lab costs. Mr. Fleming has asked you to evaluate costs in the hospital’s lab for...
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in the hospital’s lab. Charges for lab tests are consistently higher at Valley View than at other hospitals and have resulted in many complaints. Also, because of strict regulations on amounts reimbursed for lab tests, payments received from insurance companies and governmental units have not been high enough to cover lab costs. Mr. Fleming has asked you to evaluate costs in the hospital’s lab for...
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in the hospital’s lab. Charges for lab tests are consistently higher at Valley View than at other hospitals and have resulted in many complaints. Also, because of strict regulations on amounts reimbursed for lab tests, payments received from insurance companies and governmental units have not been high enough to cover lab costs. Mr. Fleming has asked you to evaluate costs in the hospital’s lab for...
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in the hospital’s lab. Charges for lab tests are consistently higher at Valley View than at other hospitals and have resulted in many complaints. Also, because of strict regulations on amounts reimbursed for lab tests, payments received from insurance companies and governmental units have not been high enough to cover lab costs. Mr. Fleming has asked you to evaluate costs in the hospital’s lab for...
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in the hospital’s lab. Charges for lab tests are consistently higher at Valley View than at other hospitals and have resulted in many complaints. Also, because of strict regulations on amounts reimbursed for lab tests, payments received from insurance companies and governmental units have not been high enough to cover lab costs. Mr. Fleming has asked you to evaluate costs in the hospital’s lab for...
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in the hospital’s lab. Charges for lab tests are consistently higher at Valley View than at other hospitals and have resulted in many complaints. Also, because of strict regulations on amounts reimbursed for lab tests, payments received from insurance companies and governmental units have not been high enough to cover lab costs. Mr. Fleming has asked you to evaluate costs in the hospital’s lab for...
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in the hospital’s lab. Charges for lab tests are consistently higher at Valley View than at other hospitals and have resulted in many complaints. Also, because of strict regulations on amounts reimbursed for lab tests, payments received from insurance companies and governmental units have not been high enough to cover lab costs. Mr. Fleming has asked you to evaluate costs in the hospital’s lab for...
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in the hospital’s lab. Charges for lab tests are consistently higher at Valley View than at other hospitals and have resulted in many complaints. Also, because of strict regulations on amounts reimbursed for lab tests, payments received from insurance companies and governmental units have not been high enough to cover lab costs. Mr. Fleming has asked you to evaluate costs in the hospital’s lab for...
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in the hospital’s lab. Charges for lab tests are consistently higher at Valley View than at other hospitals and have resulted in many complaints. Also, because of strict regulations on amounts reimbursed for lab tests, payments received from insurance companies and governmental units have not been high enough to cover lab costs. Mr. Fleming has asked you to evaluate costs in the hospital’s lab for...
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in the hospital’s lab. Charges for lab tests are consistently higher at Valley View than at other hospitals and have resulted in many complaints. Also, because of strict regulations on amounts reimbursed for lab tests, payments received from insurance companies and governmental units have not been high enough to cover lab costs. Mr. Fleming has asked you to evaluate costs in the hospital’s lab for...