Question

Problem 10-19 Comprehensive Variance Analysis in a Hospital [LO2, LO3, LO4, LO5, LO6] Marc Goudreau, administrator of Clearwater Hospital, was puzzled by the prior month ’s reports. “Every month, it’s anyone’s guess whether the lab will show a profit or a loss. Perhaps the only answer is to increase our lab fees again.” “We can’t,” replied Rhoda Groves, the controller. “There are still a lot of complaints about the last increase, particularly from the insurance companies and government health units. They’re now paying only about 84% of what we bill. I’m beginning to think the problem is on the cost side.” To determine if the Clearwater lab costs are in line with those of other hospital labs, Goudreau has asked you to evaluate the costs for the past month. Groves has provided you with the following information: a. Two basic types of tests are performed in the lab—smears and blood tests. During the past month, 3,000 smears and 1,200 blood tests were performed in the lab. b. Small glass plates are used in both types of tests. During the past month, the hospital purchased 10,000 plates at a cost of $26,880. This cost is net of a 4% purchase discount. A total of 1,600 of these plates were unused at the end of the month; no plates were on hand at the beginning of the month. c. During the past month, 1,800 hours of labour time were used in performing smears and blood tests. The cost of this labour time was $18,360.00. d. The lab’s variable overhead cost last month totalled $9,450. e. Fixed overhead cost last month totalled $14,000. Clearwater 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. Labour: Each smear should require 0.3 hours to complete, and each blood test should require 0.6 hours to complete. The average cost of this lab time is $12 per hour. Overhead: Overhead cost is based on direct labour-hours. The average rate of variable overhead is $5 per hour. The average rate of fixed overhead is $10 per hour. These rates are based on a denominator activity level of 1,250 hours per month. Required: 1. Compute the materials price variance for the plates purchased last month, and compute a materials quantity variance for the plates used last month. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).) 2-a. Compute a labour rate variance and a labour efficiency variance for the lab. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Do not round intermediate calculation and round your final answers to 1 decimal place.) 3-a. Compute the variable overhead spending and efficiency variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).) 4. Compute the fixed overhead budget and volume variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

Answer 1

Solution 1:

Standard price of plates (SP) = $2.80

Actual price of plates (AP) = $26,880 / 10000 = $2.688

Standard Qty of plates for actual lab test performed (SQ) = (3000+1200)*3 = 12600

Actual Qty of Plates consumed = 10000 – 1600 = 8400

Material Price Variance = (SP – AP) * AQ purchased = ($2.80 – $2.688) * 10000 = $1,120 F

Material Quantity variance = (SQ - AQ) * SP = (12600 - 8400) * $2.80 = $11,760 F

Solution 2:

Standard rate of direct labour (SR) = $12/hour

Standard hours for lab test (SH) = (3000*0.3) + (1200*0.60) = 1620 Hrs

Actual Direct labor cost = $18360

Actual Direct labor hours (AH) = 1800

Actual rate of direct labor (AR) = 18360/1800 = $10.20 /Hr

Labor rate variance = (SR – AR) * AH = ($12 – $10.20) * 1800 = $3,240 F

Labor efficiency variance = (SH – AH) * SR = (1620 – 1800) * $12 = $2,160 U

Solution 3:

Standard rate of variable overhead (SR) = $5/hour

Standard hours for lab test (SH) = (3000*0.3) + (1200*0.60) = 1620 Hrs

Actual variable overhead cost = $9,450

Actual Direct labor hours (AH) = 1800

Actual rate of Variable overhead (AR) = $9,450/1800 = $5.25 /Hr

Variable overhead rate variance = (SR – AR) * AH = ($5 – $5.25) * 1800 = $450 U

Variable overhead efficiency variance = (SH – AH) * SR = (1620 – 1800) * $5 = $900U

Solution 4:

Budgted fixed overhead = 1250 * $10 = $12500

Applied fixed overhead = 1620 * $10 = $16,200

Actual fixed overhead = $14,000

Fixed overhead budget variance = Budgeted fixed overhead - Actual fixed overhead = $12,500 - $14,000 = $1,500U

Fixed overhead volume variance = Applied overhead - Budgeted fixed overhead = $16,200 - $12,500 = $3,700 F