Question

In: Accounting

Ray Archuleta is the chief financial officer for the Feelgood Hospital in San Francisco. Mr. Archuleta...

Ray Archuleta is the chief financial officer for the Feelgood Hospital in San Francisco. Mr. Archuleta 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, 1,800 blood tests and 2,400 smears were performed in the lab.
  2. Small glass plates are used in both types of tests. During the past month, the hospital purchased 12,000 plates at a cost of $56,400. 1,500 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, 1,150 hours of labor time were recorded in the lab at a cost of $21,850.
  4. The lab’s variable overhead cost last month totaled $7,820.

The 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. Prepare the standard costs for direct materials and direct labor lab test. Variable overhead is applied using total standard labor hours at the actual output level.  Use decimals rounded to two places, commas if necessary and no dollar signs.
Cost Element Standard Quantity or Hours Standard Price or Rate Standard Unit Cost
Direct materials
Direct labor - Blood Tests
Direct labor - Smears

2. Calculate the six standard cost variances shopwn below for the 4,200 tests completed in the lab last month. Indicate favorable (F) or unfavorable (U). Use whole numbers, no decimals, commas if necessary and no dollar signs.

Amount Favorable or Unfavorable
Direct materials price variance
Direct materials quantity variance
Direct labor rate variance
Direct labor efficiency variance
Variable overhead rate variance
Variable overhead efficiency variance

You may prepare a separate tab in the Budget Problem Worksheet and upload it to show your work.

Solutions

Expert Solution

1.

Cost Element Standard Quantity or Hours Standard Price or Rate Standard Unit Cost
Direct materials 2 5.00 10.00
Direct labor - Blood Tests 0.3 20.00 6.00
Direct labor - Smears 0.15 20.00 3.00

2.

Amount Favorable or Unfavorable
Direct materials price variance           3,600 Favorable
Direct materials quantity variance        10,500 Unfavorable
Direct labor rate variance           1,150 Favorable
Direct labor efficiency variance           5,000 Unfavorable
Variable overhead rate variance 920 Unfavorable
Variable overhead efficiency variance           1,500 Unfavorable

Working:

Actual Cost Standard Cost
AQP x AP AQP x SP AQ x SP SQ x SP
12000 x 4.70 12000 x 5.00 10500 x 5.00 8400 x 5.00
56400 60000 52500 42000
3600 10500
Direct Materials Price Variance Direct Materials Quantity Variance
Favorable Unfavorable

AQ = 12000 - 1500 = 10500

SQ = (1800 + 2400) x 2 = 4200 x 2 = 8400

Actual Cost Standard Cost
AH x AR AH x SR SH x SR
1150 x 19.00 1150 x 20.00 900 x 20.00
21850 23000 18000
1150 5000
Direct Labor Rate Variance Direct Labor Efficiency Variance
Favorable Unfavorable

SH = (1800 x 0.3) + (2400 x 0.15) = 540 + 360 = 900

Actual Cost Standard Cost
AH x AR AH x SR SH x SR
1150 x 6.80 1150 x 6.00 900 x 6.00
7820 6900 5400
920 1500
VOH Rate Variance VOH Efficiency Variance
Unfavorable Unfavorable

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