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: a. Two types of tests are performed in the lab-blood tests and smears. During the past month, 750 blood tests and 3,000 smears were performed in the lab. b. Small glass plates are used in both types of tests. During the past month, the hospital purchased 15,000 plates at a cost of $48,450. 2,000 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, 2,000 hours of labor time were recorded in the lab at a cost of $21,600. d. The lab's variable overhead cost last month totaled $15,200 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 O.40 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 $710 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 efficiencv variances 3 of 6 < Prev Next

Answer 1

Summary of Answer
Material
Material price variance	2,550	Favorable
Material quantity variance	5,950	Unfavorable
Labor
Labor rate variance	800	Favorable
Labor efficiency variance	2,240	Unfavorable
I Would recommend to discontinued this policy. The company wants to save the labor cost by hiring the assistants instead of senior technicians. But this policy should not continue because the senior technicians are more efficient than assistants for performing the jobs. Thus, the company needs to hire an equal portion of the assistants and senior technicians.	No
Variable Overhead
Variable overhead rate variance	1,000	Unfavorable
Variable overhead efficiency variance	1,420	Unfavorable
Labor efficiency variance and variable overhead efficiency variance both have a linear relationship. Here, both variance is unfavorable variance because the assistants take more time compared to senior technicians.	Yes

Calculations

	Minus sign indicate unfavorable variance.
	Measure	plate
	Standard price per plate	$            3.40
48450/15000	Actual price per plate	$            3.23
(750+3000)*3	Standard quantity in plates	11250
	Actual quantity purchased in plates	15000
15000-2000	Actual quantity used in plates	13000
	Standard price per plate	3.40
Less	Actual price per plate	-3.23
	Difference	0.17
Multiply	Actual quantity purchased in plates	15000
	Material price variance	$          2,550
	Indicate	Favorable
	Standard quantity in plates	11250
Less	Actual quantity used in plates	-13000
	Difference	-1750
Multiply	Standard price per plate	3.40
	Material quantity variance	$        (5,950)
	Indicate	Unfavorable

	Minus sign indicate unfavorable variance.
	Measure	hour
	Standard rate per hour	$            11.20
21600/2000	Actual rate per hour	$            10.80
(750*0.8)+(3000*0.4)	Standard labor hours	1800
	Actual labor hours	2000
	Standard rate per hour	11.20
Less	Actual rate per hour	-10.80
	Difference	0.40
Multiply	Actual labor hours	2000
	Labor rate variance	$                800
	Indicate	Favorable
	Standard labor hours	1800
Less	Actual labor hours	-2000
	Difference	-200
Multiply	Standard rate per hour	11.20
	Labor efficiency variance	$          (2,240)
	Indicate	Unfavorable

	Minus sign indicate unfavorable variance.
	Measure	labor hour
	Standard variable overhead rate per labor hour	$                7.10
15200/2000	Actual variable overhead rate per labor hour	$                7.60
(750*0.8)+(3000*0.4)	Standard labor hours	1800
	Actual labor hours	2000
	Standard variable overhead rate per labor hour	7.10
Less	Actual variable overhead rate per labor hour	-7.60
	Difference	-0.50
Multiply	Actual labor hours	2000
	Variable overhead rate variance	$           (1,000)
	Indicate	Unfavorable
	Standard labor hours	1800
Less	Actual labor hours	-2000
	Difference	-200
Multiply	Standard variable overhead rate per labor hour	7.10
	Variable overhead efficiency variance	$           (1,420)
	Indicate	Unfavorable