Question

Problem 10-12 Varlance Analysis in a Hospital (LO10-1, LO10-2, LO10-3] 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. 6.25 points Mr. Fleming has asked you to evaluate costs in the hospital's lab for the past month. The following information is available: (8 01:27:50 a. 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. b. 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. c. During the past month, 2.600 hours of labor time were recorded in the lab at a cost of $28.860. d. 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. 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? Complete this question by entering your answers in the tabs below. Reg 1 Reg 2A Req 2B Req 3A Reg 3B Compute a materials price variance for the plates purchased last month and 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). Input all amounts as positive values.) Materials price variance Materials quantity variance Req1 Req 2A >

Answer 1

From the information given in the problem, I have calculated the material variances, labor variances and the variable overhead variances.

BC F G H R NO Valley View Hospitals 1. Calculation of material price variance and the material quantity variance Given information in the problem Beginning balance of plates Add: purchase of plates Less: Closing balance of plates Or Plates Plates used 18000 2600 cost of 18000 plates purchased is $58140 Cost per plate 58140 3.23 18000 15400 Actual Costs 1 Two types od tests are performed in the lab Blood test 1100 Smears 3600 2 Purchased 18000 plates at a cost of $58140.2600 plates were unused at the end of the month and the beginning balance of plates is nil. 3 2600 hours of labor time were recorded in a lab at a cost of $28860. 4 Lab's variable overhead cost is $21320. Material price variance: actual quantity purchased Standard price - Actual Price) 18000(3.4-3.23) Standard price 3060 favourable Actual price 3.4 3.23 14 15 16 17 Standard Costs 1 3 plates are required per lab test and the plates cost $3.4 each. 2 Each blood test requires 0.8 hours to complete and each smear requires 0.4 hours to complete and the average cost of this lab time is $11.8 per hour. 3 Overhead costs are based on direct labour hours and the average rate for variable overhead is $7.7 per hour. Material quantity variance: Standard Price(Standard quantity - Actual quantity used) 3.4(14100-15400) -4420 unfavourable 18 19 Blood tests Standard quantity: 3 plates per lab tests 3*4700 14100 Smears total test 1100 3600 4700

2 2a. Calculation of labor rate variance and the labor efficiency variance 2600 hours of labor time were recorded in a lab at a cost of $28860. Labor cost per hour 28860 11.1 2600 3a. Calculation of variable overhead rate variance and efficiency variance Overhead costs are based on direct labour hours the average rate for variable overhead is $7.7 per hour. Actual labor hours: 2600 hours Actual variable overhead cost is 21320 6 Labor rate variance Actual hours(Standard Rate - Actual Rate) 8 2600(11.8-11.1) 1820 favourable 11.3 Standard rate Actual rate 11.1 Variable overhead rate variance Actual hours* Standard rate - actual variable overhead cost (2600*7.7)-21320 - 1300 unfavourable 10 Variable overhead efficiency variance Standard rate(Standard hours - Actual hours) 7.712320 - 2600) -2156 unfavourable Standard hours Actual hours 2320 2600 11 Labor efficiency variance 12 Standard rate(Standard hours - Actual hours) 13 11.8(2320-2600) -3304 unfavourable 15 16 Standard hours: Blood test requires 0.8 hours and smears requires 0.4 hours hours 18 Blood test 1100 0.8 880 19 Smears 3600 0.4 1440 20 Standard hours 2320 21 22 2b. Valley view hospitals employ one fourth of senior techinicians and three fourth of 22 assistants in order to reduce the costs. 24 From the labor variance, labor rate variance is favourable whereas labor efficiency variance 25 is unfavourable, hence I recommned the hospital to make necessary changes to the 26 policy to improve the efficiency. 3b. Both the labor efficiency variance and the variable overhead efficiency variance are based on direct labor hours.