Data P10-1: John Fleming, chief administrator for Valley View Hospital, is conce
ID: 2465719 • Letter: D
Question
Data P10-1: 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, payment 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, 1800 blood tests and 2,400 smears were performed in the lab. b. Small glass plates are used in both types of tests. During the past month, the hospital purchased 12,000 plates at a cost of $28,200. This cost is net of a 6% quantity discount. 1,500 of these plates were unused at the end of the moth; no plates were on hand at the beginning of the month. c. During the past month, 1,150 hours of labor time were recorded in the lab at a cost of $13,800. d. The lab's variable overhead cost last month totaled $7,820. Valley View Hospital has never used standard costs. By searching industry literature, however you have determined the following nation wide averages for hospital labs. Plates: Two plates are required per lab test. These plates cost $2.50 each and are disposed of after the test is completed. Labor: Each blood test should require 0.3 hours to complete, and each smear should require 0.15 hours to complete. The average cost of this lab time is $14 per hour. Overhead: Overhead cost is based on direct labor-hours. The average rate for variable overhead is $6 per hour. Much of the information above is summarized below: VALLEY VIEW HOSPITAL Number of blood tests 1,800 Number of smears 2,400 Number of plates purchased 12,000 Cost of plates $28,200 Quantity discount allowed 6% Unused plates at month end 1,500 Labor hours 1,150 Cost of labor hours $13,800 Variable overhead costs $7,820 Nationwide averages: Number of plates per test 2 Cost per plate $2.50 Time for blood test (hours) 0.30 Time for smear (hours) 0.15 Average cost of lab time per hour $14.00 Variable overhead rate per hour $6.00 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. Compute the variable overhead spending and efficiency variances. Is there any relation between the variable overhead efficiency variance and the labor efficiency variance? Explain. Data P10-1: 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, payment 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, 1800 blood tests and 2,400 smears were performed in the lab. b. Small glass plates are used in both types of tests. During the past month, the hospital purchased 12,000 plates at a cost of $28,200. This cost is net of a 6% quantity discount. 1,500 of these plates were unused at the end of the moth; no plates were on hand at the beginning of the month. c. During the past month, 1,150 hours of labor time were recorded in the lab at a cost of $13,800. d. The lab's variable overhead cost last month totaled $7,820. Valley View Hospital has never used standard costs. By searching industry literature, however you have determined the following nation wide averages for hospital labs. Plates: Two plates are required per lab test. These plates cost $2.50 each and are disposed of after the test is completed. Labor: Each blood test should require 0.3 hours to complete, and each smear should require 0.15 hours to complete. The average cost of this lab time is $14 per hour. Overhead: Overhead cost is based on direct labor-hours. The average rate for variable overhead is $6 per hour. Much of the information above is summarized below: VALLEY VIEW HOSPITAL Number of blood tests 1,800 Number of smears 2,400 Number of plates purchased 12,000 Cost of plates $28,200 Quantity discount allowed 6% Unused plates at month end 1,500 Labor hours 1,150 Cost of labor hours $13,800 Variable overhead costs $7,820 Nationwide averages: Number of plates per test 2 Cost per plate $2.50 Time for blood test (hours) 0.30 Time for smear (hours) 0.15 Average cost of lab time per hour $14.00 Variable overhead rate per hour $6.00 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. Compute the variable overhead spending and efficiency variances. Is there any relation between the variable overhead efficiency variance and the labor efficiency variance? Explain.Explanation / Answer
Answer:
2 b. It is not recommendable to employ assistant for senior technician. We can see above that although rate has gone down from $ 14 per hour to $12 per hour but hours have been significantly increase from 900 hours to 1,150 hours. It leads to unfavorable efficiency variance of $ 3,500. Because of this total unfavorable variance is $ 1,200 (3,500-2,300).
Yes, there is a relationship between variable overhead efficiency variance and labor efficiency variance. Both will be in same direction (favourable or unfavorable) when variable overheads are based on direct labor hours.
Legends AR= Actual Rate 2.35 =28200/12000 SR= Standard Rate 2.50 AQP= Actual Quantity 12,000 AQU= Actual Quantity 10,500 =12000-1500 SQ= Standard Quantity 8,400 =2*(1800+2400) U Unfavorable F FavorableRelated Questions
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