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, 1,100 blood tests and 3,600 smears were performed in the lab.

Small glass plates are used in both types of tests. During the past month, the hospital purchased 18,000 plates at a cost of $58,140. 2,600 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, 2,600 hours of labor time were recorded in the lab at a cost of $28,860.

The lab’s variable overhead cost last month totaled $21,320.

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 $11.80 per hour.

Overhead: Overhead cost is based on direct labor-hours. The average rate for variable overhead is $7.70 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. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)

2. For labor cost in the lab:

a. Compute a labor rate variance and a labor efficiency variance. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero 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?

	Yes
	No

3-a. Compute the variable overhead rate and efficiency variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)

3-b. Is there any relation between the variable overhead efficiency variance and the labor efficiency variance?

	Yes
	No

rev: 06_13_2016_QC_CS-53459, 05_02_2017_QC_CS-86476

References

Answer 1

Data for Resource variance

Particulars	Standard			Actual
Material	14100	3.40	47940	15400	3.23	49742
labour	2360	11.80	27848	2600	11.1	28860
Overhead	2360	7.7	18172	2600	8.2	21320
Total			93960			99922

working note

1. Material

SQ = (3600+1100)*3 = 14100

SR - given

AQ - 18000-2600 = 15400

AR = 58140/18000 = 3.23

2. Labour

SHrs = (1100*.8) + (3600*.4) = 2320

SR = given

AHrs = given

AR = 21320/2600 = 8.2

Calculation of Variance

1a. Material Price variance

Formula :- (SR-AR)AQ

(3.40-3.23)*15400 = 2618 F

1b. Material Quantity Variance

Formula :- (SQ-AQ)*SR

(14100-15400)*3.40 = 4420 U

2a. Labour rate variance

Formula :- (SR-AR)AHW

(11.80-11.1)*2600 = 1820 F

2a. Labour Efficiency Variance

Formula :- (SHrs - AHrs)*SR

2b. No because it will increase the labour hours worked and as a consequence labour cost will also increase.

(2360-2600)*11.80 = 2832 U

3a. variable overhead rate variance

Formula :- (SR-AR)AHW

(7.70-8.2)*2600 = 1300 U

variable overhead efficiency variance

Formula :- (SHrs - AHrs)*SR

(2360-2600)*7.70 = 1848 U

3a. Labour Efficiency Variance

Formula :- (SHrs - AHrs)*SR

(2360-2600)*11.80 = 2832 U

3b. Yes there is a direct relation variable and labour efficiency variance because in both variance we use the same labour hours if the lab efficiency variance is unfavourable then variable overhead eff. variance will also be unfavourable