Question

16

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, 300 blood tests and 2,200 smears were performed in the lab.

Small glass plates are used in both types of tests. During the past month, the hospital purchased 11,000 plates at a cost of $29,260. 1,200 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, 1,200 hours of labor time were recorded in the lab at a cost of $12,480.

The lab’s variable overhead cost last month totaled $8,160.

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 $2.80 each and are disposed of after the test is completed.

Labor: Each blood test should require 0.6 hours to complete, and each smear should require 0.30 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 $6.30 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

Computation of Standard Quantity Allowed
Blood tests	300
Smears	2200
Total	2500
Plates per test	3
Standard quantity allowed	7500

(1)Computation of Material Price & Quanitity Variance

Materials price variance = AQ (SP – AP)

Actual Cost per Plates =29260/11000=2.66

Material Price Variance =11000*(2.80-2.66)=1540 F

Materials quantity variance = SP (SQ – AQ)

$2.80 X (7500 plates – (11000-1200 plates) )

2.80*(7500-9800)=$6440 U

2(a)Computation of Labour Price & Efficiency Variance

Blood tests: 0.60 hour per test × 300 tests= 180 Hours

Smears: 0.30 hour per test ×2200 tests= 660 Hour

Total standard hours allowed:- 840 Hour

Labor rate variance = AH (SR – AR)

1200 hours ($11.20 per hour – $10.40 per hour*) =960 F

*$12480 ÷ 1,200 hours = $10.40per hour

Labor efficiency variance = SR (SH – AH)

= 11.20*(840-1200)=4032 U

2(b) The policy probably should not be continued

3(a)Computation of Variable Overhead rate & Efficiency Variance

Variable overhead spending variance = AH (SR – AR)

1200 hours ($6.30 per hour – $6.80 per hour*) =600U

$8160/1200 =$6.80

Labor efficiency variance = SR (SH – AH)

"=6.3*(840-1200)=$2268 U

3(b)Yes, there is a close relation between the two variances