Question

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: a. Two types of tests are performed in the lab-blood tests and smears. During the past month, 750 blood tests and 3,000 smears were performed in the lab. b. Small glass plates are used in both types of tests. During the past month, the hospital purchased 15,000 plates at a cost of $48,450. 2,000 of these plates were unused at the end of the month; no plates were on hand at the beginning of the month. c. During the past month, 2,000 hours of labor time were recorded in the lab at a cost of $21,600. d. The lab's variable overhead cost last month totaled $15,200. 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 $3.40 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 $11.20 per hour. Overhead: Overhead cost is based on direct labor-hours. The average rate for variable overhead is $7.10 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?

Answer 1

Requirements: Computation of Material Price Quantity Variance: Standard quantity of material for actual test = (750+3000) * 3 = 11250 plates Actual quantity of material purchased = 15000 plates Actual quantity of material used = 15000 - 2000 = 13000 plates Standard price of material = $ 3.4 Actual price of material = $48450 / 15000 = $3.23 Material price variance = (SP - AP) * AQ purchased = ($3.4 - $3.23) * 15000 = $2550 F Material quantity variance = (SQ - AQ) * SR = (11250 - 13000) * $3.4 = $5,950 U Requirement 2a: Standard hours of direct labor = 750*0.8 + 3000*0.4 = 1800 hours Standard rate of direct labor = $11.20 per hour Actual hours of direct labor = 2000 Actual rate of direct labor = $21600 / 2000 = $10.8 per hour Direct labor rate variance = (SR - AR) * AH = ($11.20 - $10.8) * 2000 = $800 F Direct labor efficiency variance = (SH - AH) * SR = (1800 - 2000) * $11.20 = $2240 U Requirement 2b: NO Requirement 3a: Standard hours of direct labor = 750*0.8 + 3000*0.4 = 1800 hours Standard rate of variable overhead= $7.10 per hour Actual hours of direct labor = 2000 Actual rate of variable overhead = $15200 / 2000 = $7.60 per hour Variable overhead rate variance = (SR - AR) * AH = ($7.10 - $7.60) * 2000 = $1000 U Variable overhead efficiency variance = (SH - AH) * SR = (1800 - 2000) * $7.10 = $1420 U Requirement 3b: Yes Kindly Comment down for any clarifications/ queries and please upvote.