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, 1,150 blood tests and 3,700 smears were performed in the lab.

Small glass plates are used in both types of tests. During the past month, the hospital purchased 18,500 plates at a cost of $69,560. 2,700 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, 2,700 hours of labor time were recorded in the lab at a cost of $30,105.

The lab’s variable overhead cost last month totaled $22,410.

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 $4.00 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 $11.90 per hour.

Overhead: Overhead cost is based on direct labor-hours. The average rate for variable overhead is $7.80 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

1) Material price variance is computed for the actual quantity of materials consumed.

Material Price Variance = Actual Quantity (Standard Price- Actual Price)

Here

>Actual quantity= Purchase made - Closing inventory

18500-2700= 15800 plates

>Actual Price= Actual Purchase Cost/ Actual Quantity

69560/18500= $37.6 per plates

Standard Price (Given) = $4

Material Price Variance= 15800($4-$3.76) =$3792 Favourable

II) Material Quantity Variance (MQV) = Standard Price (Standard quantity- Actual Quantity)

Here

Standard Quantity = 3 plates per test * (1150+3700)= 14550 Plates

MQV= $4(14550-15800)= $5000 Unfavourable or Adverse

2) (a)

I) Labour Rate Variance (LRV)= Actual Labour Hours (Standard Rate- Actual Rate)

    Here

Actual Labour Hours (given)= 2700 hrs

Actual Labour Hours Rate = Actual Labour cost/ Actual labour hours

                                           = $30105/2700= $11.15

Standard Rate (Given)      = $11.90

LRV= 2700(11.90-11.15) = $2025 Favourable

II) Labour efficiency Variance (LEV)= Standard Rate (standard Hours- Actual Hours)

Here

Standard Hour= 0.8* 1150 blood test+ 0.4 Hours* 3700 smears test= 2400 hours

LEV= 11.90( 2400-2700)= 3570 Unfavourable or Adverse

(b)

Labour Cost Variance = Labour Rate variance+ labour efficiency variance

=2025+ (-3570)= $1545

As we see that due to policy of valley view hospital employee only one fourth technician the rate of labour got decreases on average labour rate hence we got an favourable labour rate variance but less experience take much time then experienced technician so the actual labour hours increases and we get an unfavourable labour efficiency variance overall company incur more labour cost then standard cost, so it would not much recommended the company policy applying only one fourth senior technician.

(3)

(I) Variable overhead Rate Variance= Actual Hour (Standard Rate- Actual Rate)

= 2700(7.8-8.3)= 1350 Unfavourable or Adverse

Actual rate= Actual Variable cost/ actual labour hours

                  =   22410/2700= $8.3

(II) Variable overhead efficiency Variance

       = Standard rate (Standard Hours- Actual Hours)

       = 7.8(2400-2700) = $2340 Unfavourable or Adverse

(3)

Variable overhead efficiency variance and labour efficiency variance directly connected with the actual labour hour taken and the standard labour hour, when the labour efficiency variance is unfavourable that means labour taking more time than the standard set by the company, when labour taking more time, then cost of labour is increase and also the cost of overhead also increase with every additional labour hour and given unfavourable efficiency variance so we can say the labour efficiency variance and variable overhead efficiency variance ie related with each other..