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:

1. Two types of tests are performed in the lab—blood tests and smears. During the past month, 1,200 blood tests and 3,800 smears were performed in the lab.

2. Small glass plates are used in both types of tests. During the past month, the hospital purchased 19,000 plates at a cost of $62,510. 2,800 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, 2,800 hours of labor time were recorded in the lab at a cost of $31,360.

4. The lab’s variable overhead cost last month totaled $23,520.

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 $3.50 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 $12.00 per hour.

Overhead: Overhead cost is based on direct labor-hours. The average rate for variable overhead is $7.90 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

Question 1

Material Price Variance = (Standard Rate per Plate - Actual Rate per Plate) * Actual Plates Purchased

Actual Plates Purchased = 19,000 Plates

Standard Rate per Plate Purchased = $ 3.50

Actual Rate per Plate = Total Purchases Cost / Total Units Purchased

= 62,510 / 19,000

= $ 3.29 per Plate

Material Price Variance = (3.50 - 3.29) * 19,000

Material Price Variance = $ 3,990 Favourable Variance

Material Quantity Variance = (Standard Quantity of Plates for Actual Total Tests - Actual Plates Used) * Standard Cost per Plate

Standard Cot per Plate = $ 3.50

Actual Plates Used = 16,200 Units (Plates Purchased - Plates in Ending Inventory)

Standard Quantity of Plate for Actual Test = 5,000 Test * 3 Plates per Test = 15,000 Plates

Material Quantity Variance = (15,000 - 16,200) * 3.50

Material Quantity Variance = ($ 4,200) Unfavorable Variance

Question 2

Part 2A

Labour Rate Variance = (Standard Labour Rate per Hour - Actual Labour Rate per Hour) * Actual Hours Worked

Actual Hours Worked = 2,800 Hours

Standard Labour Rate per Hour = $ 12

Actual Labour Rate per Hour = $ 11.20 (Actual Labour Costs / Actual Labour Hours)

Labour Rate Variance = (12 - 11.20) * 2,800

Labour Rate Variance = $ 2,240 Favourable Variance

Labour Efficiency Variance = (Standard Labour Hours for Actual Test - Actual Hours Worked) * Standard Labour Rate per Hour

Standard Labour Rate per Hour = $ 12

Actual Hours Worked = 2,800

Standard Labour Hours for Actual Test = 2,480 Hours ( 1,200 Blood Test * 0.8 Hours per Blood Test + 3,800 Smear Test * 0.2 Hours per Smear Test)

Labour Efficiency Variance = (2,480 - 2,800) * 12

Labour Efficiency Variance = ($ 3,840) Unfavorable Variance

Part 2B

No the Policy should not be continued because this might have reduced the labour rate variance but the labour efficiency variance has been badly affected so the overall cost variance increases as a result of this policy so it is better to discontinue policy to reduce the costs.

Question 3

Variable Overhead Rate Variance = (Standard Variable Overhead Rate per Hour * Actual Hours) - Actual Variable Overhead Cost

Actual Variable Overhead Cost = $ 23,520

Actual Hours = 2,800 Hours

Standard Variable Overhead Rate per Hour = $ 7.90

Variable Overhead Rate Variance = (2,800 * 7.90) - 23,520

Variable Overhead Rate Variance = ($ 1,400) Unfavorable Variance

Variable Overhead Efficiency Variance = (Standard Variable Overhead Rate per Hour * Standard Hours for Actual Test) - (Standard Variable Overhead Rate per Hour * Actual Hours)

Standard Variable Overhead Rate per Hour = $ 7.90

Actual Hours = 2,800 Hours

Standard Hours for Actual Test = 2,480 Hours

Variable Overhead Efficiency Variance = (7.90 * 2,480) - (7.90 * 2,800)

Variable Overhead Efficiency Variance = ($ 2,528) Unfavorable Variance

Part 3B

Yes Both Variable Overhead Efficiency Variance and Labour Efficiency Variance are related to eachother as the Variable Overhead Cost are based in direct Labour hours so the efficiency variances are also correlated to each other. as one improve other also improves and vice versa.