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:
Valley View Hospital has never used standard costs. By searching industry literature, however, you have determined the following nationwide averages for hospital labs:
Plates: Two plates are required per lab test. These plates cost $5.00 each and are disposed of after the test is completed.
Labor: Each blood test should require 0.3 hours to complete, and each smear should require 0.15 hours to complete. The average cost of this lab time is $20 per hour.
Overhead: Overhead cost is based on direct labor-hours. The average rate for variable overhead is $6 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 | The standard Quantity of plates allowed for test performed during the month is: | ||||
Smears | 2400 | ||||
Blood Test | 1800 | ||||
Total | 4200 | ||||
Plates per Test | 2 | ||||
standard quantity allowed | 8400 | ||||
Direct material price variance = | Actual quantity (Actual Price - Standard price) | ||||
12000 ($4.7-$5) | |||||
$3600 (F) | |||||
Direct material Quantity variance = | Standard price (Actual Quantity-Standard quantity) | ||||
$5 (10500-8400) | |||||
$10500 (UF) | |||||
2 (a) | Smears : .15 hour per test * 2400 test | 360 | |||
Blood test: 0.3 hour per test * 1800 | 540 | ||||
Total Standard hours allowed | 900 | ||||
Direct labor rate variance = | Actual hours(Actual rate - Standard rate) | ||||
1150 ($19-$20) | |||||
$1150 (F) | |||||
Direct labor efficiency variance = | Standard rate (Actual hours-Standard hours) | ||||
$20 (1150-900) | |||||
$5000 (UF) | |||||
2(b) | The policy is to keep 25% senior technician and 75% assistant, has resulted in favourable labor | ||||
rate variance . However , due to low efficiency of assistants, there is unfavourable labor efficiency | |||||
variance . The total labor variance is $3850 (UF) | |||||
If the management is confident about increase in efficiency of assistance and decrease in unfavourable | |||||
efficiency variance, the policy will have to continue. It will result in favourable total labor variance. | |||||
3 (a) | Variable Overhead rate variance = | Actual hours(Actual rate - Standard rate) | |||
1150($6.8-$6) | |||||
$920 (UF) | |||||
Variable Overhead efficiency variance = | Standard rate (Actual hours-Standard hours) | ||||
$6 (1150-900) | |||||
$1500 (UF) | |||||
b | The relation between manufacturing overhead efficiency variance and labor efficiency variance is that | ||||
both are computed of direct labor hours. Since computation is same so result will also same. If | |||||
manufacturing overhead efficiency is unfavourable then labor efficiency variance would also 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...