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: 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. 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. During the past month, 2,000 hours of labor time were recorded in the lab at a cost of $21,600. 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? 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?

Answer 1

	Actual Data:		Industry Standards:
	Number of tests performed
	Blood Tests	750
	Smears	3,000
	TOTAL	3,750
	Cost of glass plates ($)	48,450
	Glass Plates purchased (Qty.)	15,000
	Glass Plates used (Qty.)	13,000	3 plates are required per lab test (that is, standard quantity = 3750 tests * 3 = 11,250
	Purchase price per plate ($)	3.23	Standard rate = $3.40 per plate
	Total Cost of Labour ($)	21,600
	Labour Hours used	2,000	0.80 hrs are required for each blood test & 0.40 hours are required for each smears test (that is, standars hours = [(750 blood tests * 0.8) + (3000 smears * 0.40)] = 1800 hours
	Cost per hour ($)	10.80	Standard rate = $11.20 per hour
	Total Variable overhead cost ($)	15,200
	Labour Hours Worked	2,000
	Cost per hour ($)	7.60	Standard rate = $7.10 per labour hour
	Calculation of variances:
	1. Material Price Variance = (Standard Price per unit - Actual Price per unit) * Actual Quantity Used
a	Standard Price per unit of Glass Plate	3.40
b	Actual Price per unit of Glass Plate	3.23
c	Actual Quantity Used	13,000
d	Material Price Variance	2,210	Favourable
	[(a) - (b)] * (c)
	2. Material Quantity Variance = (Standard Quantity - Actual Quantity) * Standard Price Per Unit
a	Standard quantity of Glass Plates required for testing	11,250
b	Actual Glass Plates used	13,000
c	Standard Price per unit of Glass Plate	3.40
d	Material Quantity Variance	-5,950	Unfavourable
	[(a) - (b)] * (c)
	3. Labour Rate Variance = (Standard rate per hour - Actual rate per hour) * Actual labour hours used
a	Standard Price per hour	11.20
b	Actual Price per hour	10.80
c	Actual Hours Worked	2,000
d	Labour Rate Variance	800	Favourable
	[(a) - (b)] * (c)
	4. Labour Efficiency Variance = (Standard hours for actual output - Actual hours worked) * Standard rate per hour
a	Standard hours for actual output	1,800
b	Actual Hours Worked	2,000
c	Standard Price per hour	11.20
d	Labour Efficiency Variance	-2,240	Unfavourable
	[(a) - (b)] * (c)
	5. Variable Overhead Rate Variance = (Standard rate per hour - Actual rate per hour) * Actual hours worked
a	Standard Price per hour	7.10
b	Actual Price per hour	7.60
c	Actual Hours Worked	2,000
d	Variable Overhead Rate Variance	-1,000	Unfavourable
	[(a) - (b)] * (c)
	6. Variable Overhead Efficiency Variance = (Standard hours for actual output - Actual hours worked) * Standard rate per hour
a	Standard hours for actual output	1,800
b	Actual Hours Worked	2,000
c	Standard Price per hour	7.10
d	Variable Overhead Efficiency Variance	-1,420	Unfavourable
	[(a) - (b)] * (c)
	Question:
	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:
	If Valley View Hospital is following this policy, we can see that it is saving the labour costs as the Labour Rate Variance is favourable. But due this, the efficieny of the staff is low due to lack of knowledge of assistants which results in unfavourable Labour efficiency variance. Labour Rate Variance is favourable by $800 but Labour efficieny variance is unfavourable by $2240. Which indicates that the Hospital is incurring a extra cost due to such policy. Therefore, it is recommended that this policy should not be continued.
	Question:
	Is there any relation between the variable overhead efficiency variance and the labor efficiency variance?
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