John Fleming, chief administrator for Valley View Hospital, is concerned about t
ID: 2460114 • Letter: J
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:
Explanation / Answer
Standard Quantity/hours Rate Total Plates 3 3.4 10.2 Labor blood test 0.8 11.2 8.96 smear 0.4 11.2 4.48 overhead blood test 0.8 7.1 5.68 smear 0.4 7.1 2.84 1) Material Price variance = ( Actual price - Standard price) * actual quantity = ( 3.23 - 3.4) * 15000 = -2550 F Materia quantity variance = (Actual quantity - standard quantity) * standard price = ( 13000 - 3*(3000+750) * 3.4 = (13000 - 11250 ) * 3.4 = 1750 * 3.4 = 5950 UF 2a) Labor rate variance = ( Actual rate - standard rate ) * actual hours Actual rate = 21600/2000 = 10.8 Labor rate variance = ( 10.8 - 11.2) * 2000 = -0.4 * 2000 = 800 F 2240 Labor efficiency variance = (Actual hours - standard hours ) * standard rate = ( 2000 - (750 *0.8 + 3000 *0.4) ) * 11.2 = ( 2000 - 1800) *11.2 = 200 * 11.2 = 2240 UF 2b) This policy should not be continued , because the mix of the two is not optimal as the actua hours worked are more than the standard hours allowed Hence the mix should be changed and even though the labor rate variance is favourable , the sum of the two variances is unfavourable 3a) Variable overhead rate variance = Actual variable overhead - Actual hours * standard rate per hour = 15200 - 2000*7.1 =15200 -14200 = 1000 UF Variable overhead efficiency variance = ( Standard hours - Actual hours ) * standard rate per hour = (1800 - 2000) * 7.1 = -200 *7.1 = 1420 UF 3b) Yes , there is a direct relation between labor efficiency variance and variable overhead efficiency variance as variable overhead efficiency variance depends upon the standard and actual hours worked hence as many hours are required for labor variance , similar hours are used to calculate variable overhead variance The formulae to calculate both these variances are the same
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