Question

QUESTION TWO:

Comprehensive Variance Analysis in a Hospital

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 80% 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:

1. Two basic types of tests are performed in the lab—smears and blood tests. During the past month, 2,700 smears and 900 blood tests were performed in the lab.
2. Small glass plates are used in both types of tests. During the past month, the hospital purchased 16,000 plates at a cost of $38,400. This cost is net of a 4% purchase discount. A total of 2,000 of these plates were unused at the end of the month; no plates were on hand at the beginning the month.
3. 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 $18,450.
4. The lab's variable overhead cost last month totalled $11,700.
5. Fixed overhead cost last month totalled $10,400.

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 $2.50 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 $6 per hour. The average rate of fixed overhead is $8 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.
2. For labour cost in the lab:
   1. Compute a labour rate variance and a labour efficiency variance.
   2. In most hospitals, three-quarters of the workers in the lab are certified technicians and one-quarter are assistants. In an effort to reduce costs, Clearwater Hospital employs only one-half certified technicians and one-half assistants. Would you recommend that this policy be continued? Explain.
3. Compute the variable overhead spending and efficiency variances. Is there any relationship between the variable overhead efficiency variance and the labour efficiency variance? Explain.
4. Compute the fixed overhead budget and volume variances.

Answer 1

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Working-1
Total Plates Needed (3 plates per test)
Blood Test	900	A
Smear Test	2,700	B
Total Test	3,600	C=A+B
Plate neeed per test	3	D
Total Plates needed	10,800	E=C*D
1. Material Price & Quantity Variance
Material Price Variance	(Actual Rate-Standard Rate)*Actual Quantity Purchased
	(2.4-2.5)*16,000
	1600	Favorable
Actual Rate	2.5	given
Standard Rate	2.4	38400/16000
Actual Quantity Pur	16000	given
Material Quantity Variance	(Standard Q-Actual Q USED)*Standard Rate
	(10800-14000)*2.4
	7680	Unfavorable
Standard Rate	2.4	38400/16000
Actual Quantity USED	14000	16,000-2,000
Standard Quantity	10800	Working-1
2a.Labor efficiency & Labor Rate
Standard Hour Required	(Blood Test*Hour)+(Smear Test*Hour)
	(900*0.6)+(2700*0.3)
	1350
Standard Rate	12
Actual Rate	1800 Hour at cost of 18450
	18450/1800
	10.25
Labor Rate Varaince	(Actual Rate-Standard Rate)*Actual Hours Purchased
	(10.25-12)*1800
	3150	Favorable
Labor efficiency Variance	(Standard Hr-Actual Hrs)*Standard Rate
	(1350-1800)*12
	5400	Unfavorable
2b. Existing policy is not recommended as work of senior technician can not be performed with same quality by Assistant and that can be seen in efficiency variance above which is unfavorable
3a.Variable Overhread Rate and efficiency
Actual Variable Ovh Rate	11700 Last Month overhead, 1800 hours
	11700/1800
	6.5
Standard Variable Ovh Rate	6
Ovh Rate Varaince	(Standard Rate-Actual Rate)*Actual Hours Purchased
	(6-6.5)*1800
	900	Unfavorable
Ovh efficiency Variance	(Standard Hr-Actual Hrs)*Standard Rate
	(1350-1800)*6
	2700	Unfavorable
Yes, There is direct relationship between two. Since inefficient labor will make both Variable overhead efficiency unfavorable
4. Fixed overhead:
Actual Fixed Overhead		$                                                                  10,400	a
Budgeted Fixed Overhead	1,250*$8	$                                                                  10,000	b
Applied Fixed overhead	1,350*$8	$                                                                  10,800	c
Fixed overhead volume variance		$                                                                        800	Unfavorable	b-c
Fixed overhead budget variance		$                                                                        400	Unfavorable	a-b