John Fleming, chief administrator for Valley View Hospital, is concerned about t

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, 700 blood tests and 2,900 smears were performed in the lab b. Small glass plates are used in both types of tests. During the past month, the hospital purchased 14,500 plates at a cost of $54,520. 1,900 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, 1,900 hours of labor time were recorded in the lab at a cost of $20,425 d. The lab's variable overhead cost last month totaled $14,250 Valley View Hospital has never used standard costs. By searching industry literature, however, you havee rages for hospital labs determined the following nationwide ave PlatesThree plates are required per lab test. These plates cost $4.00 each and are disposed of after the test is completed 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 $11.10 per hour Overhead cost is based on direct labor-hours. The average rate for variable overhead is $7.00 per hour Labor Overhead:

Explanation / Answer

1) Actual Material Price per plate = $54,520/14,500 plates purchased = $3.76 per plate

Material Price Variance for plates purchased = (Std Price - Actual Price)*Actual plates purchased

= ($4 - $3.76)*14,500 plates = $3,480 Favorable

Total Actual tests = 700 blood tests+2,900 smears = 3,600 tests

Standard plates required for actual tests = 3,600 tests*3 plates per test = 10,800 plates

Actual plates used = 14,500 - 1,900 = 12,600 plates

Material Quantity Variance = (Std Qty - Actual Qty)*Std Price

= (12,600 - 10,800)*$4 = $7,200 Favorable

2) Std hours required for actual tests = (700 bloods tests*0.80 hr)+(2,900 Smears*0.40 hr)

= 560 hrs+1,160 hrs = 1,720 hrs

Actual rate per hour = $20,425/1,900 hrs = $10.75 per hour

Labor Rate Variance = (Std Rate - Actual rate)*Actual Hours

= ($11.10 - $10.75)*1,900 hrs = $665 Favorable

Labor Efficiency Variance = (Std hrs - Actual hrs)*Std Rate

= (1,720 hrs - 1,900 hrs)*$11.10 = ($1,998) Unfavorable

3) Actual variable overhead rate per hour = $14,250/1,900 hrs = $7.50 per hour

Variable Overhead Rate Variance = (Std Rate - Actual Rate)*Actual Hrs

= ($7.00 - $7.50)*1,900 hrs = ($950) Unfavorable

Variable Overhead Efficiency Variance = (Std Hrs - Actual Hrs)*Std rate

= (1,720 hrs - 1,900 hrs)*$7.00 = ($1,260) Unfavorable

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