Question

Marc Goudreau, administrator of Clearwater Hospital, was puzzled by the prior month’s reports. “Every month, it’s anyone’s guess whether the lab will show a profit or a loss. Perhaps the only answer is to increase our lab fees again.”

“We can’t,” replied Rhoda Groves, the controller. “There are still a lot of complaints about the last increase, particularly from the insurance companies and government health units. They’re now paying only about 82% of what we bill. I’m beginning to think the problem is on the cost side.”

To determine if the Clearwater lab costs are in line with those of other hospital labs, Goudreau has asked you to evaluate the costs for the past month. Groves has provided you with the following information:

1. Two basic types of tests are performed in the lab—smears and blood tests. During the past month, 2,400 smears and 600 blood tests were performed in the lab.
2. Small glass plates are used in both types of tests. During the past month, the hospital purchased 20,000 plates at a cost of $42,240. This cost is net of a 4% purchase discount. A total of 2,000 of these plates were unused at the end of the month; no plates were on hand at the beginning of the month.
3. During the past month, 1,200 hours of labour time were used in performing smears and blood tests. The cost of this labour time was $11,700.00.
4. The lab’s variable overhead cost last month totalled $5,630.
5. Fixed overhead cost last month totalled $13,000.

Clearwater 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 $2.20 each and are disposed of after the test is completed.
Labour:	Each smear should require 0.3 hours to complete, and each blood test should require 0.6 hours to complete. The average cost of this lab time is $12 per hour.
Overhead:	Overhead cost is based on direct labour-hours. The average rate of variable overhead is $4 per hour. The average rate of fixed overhead is $10 per hour. These rates are based on a denominator activity level of 1,250 hours per month.

Required:

1. Compute the materials price variance for the plates purchased last month, and compute a materials quantity variance for the plates used last month. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

2. Compute a labour rate variance and a labour efficiency variance for the lab. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Do not round intermediate calculation and round your final answers to 1 decimal place.)

3. Compute the variable overhead spending and efficiency variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

4. Compute the fixed overhead budget and volume variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

Answer 1

Computation of Material variance
	Formula
Material Price Variance	(Standard Price-Actual Price)*Actual quantity	Standard Price	$                                       2.20
		Actual Price	$                                       2.11
		Actual Qty	18,000
		Material Price Variance	1584	F
Material Usage Variance	(Standard Quantity-Actual Quantity)*Standard Price	Standard Qty	9,000	(2400+600)*3
		Actual Qty	18,000
		Standard Price	$                                       2.20
		Material Usage Variance	-19800	U
Labour variance
Labour rate variance	Actual Time Taken (Standard Rate – Actual Rate)	Standard rate	$                                    12.00
		actual rate	$                                       9.75	11700/1200
		actual time taken	1,200
		Labour rate variance	2700	F
Labour efficiency Variance	Standard rate (Standard Time - actual time)	Standard rate	$                                    12.00
		Standard Time	1,080	(2400*.3)+(600*.6)
		actual time taken	1,200
		Labour efficiency Variance	$               -1,440	U
Fixed overhead variance
Fixed overhead spending variance	Actual fixed overhead-Budgeted Fixed overhead	Actual fixed overhead	$                            13,000.00
		Budgeted Fixed overhead	$                            12,000.00	1200*10
		Fixed overhead spending variance	$                1,000.00	U
Fixed overhead Volume variance	Absorbed Fixed overheads - Budgeted Fixed overheads	Actual hours	1,200
		Budgeted hours	1,080
		Fixed overhead absorption rate	$                                    10.00
		Absorbed Fixed overheads	$                            12,000.00	1200*10
		Budgeted Fixed overheads	$                            10,800.00	1080*10
		Fixed overhead Volume variance	$                1,200.00	F
Variable overhead variance
Variable overhead spending variance	(Standard variable overhead Rate − Actual Variable Overhead Rate)*Actual labour hours	Standard variable overhead Rate	$                                       4.00	Per hour
		Actual Variable Overhead Rate	$                                       4.69	5630/1200
		Actual labour hours	1,200
		Variable overhead spending variance	-830	U
Variable overhead Efficiency variance	Standard overhead rate x (Actual hours - Standard hours)	Standard variable overhead Rate	$                                       4.00
		Actual hours	1,200
		Standard hours	1,080	(2400*.3)+(600*.6)
		Variable overhead Efficiency variance	480	U