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:

Two types of tests are performed in the lab—blood tests and smears. During the past month, 1,500 blood tests and 4,400 smears were performed in the lab.

Small glass plates are used in both types of tests. During the past month, the hospital purchased 22,000 plates at a cost of $52,800. 3,400 of these plates were unused at the end of the month; no plates were on hand at the beginning of the month.

During the past month, 3,400 hours of labor time were recorded in the lab at a cost of $39,100.

The lab’s variable overhead cost last month totaled $30,600.

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 $2.50 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 $12.60 per hour.

Overhead: Overhead cost is based on direct labor-hours. The average rate for variable overhead is $8.50 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. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)

2. For labor cost in the lab:

a. Compute a labor rate variance and a labor efficiency variance. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero 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. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)

3-b. Is there any relation between the variable overhead efficiency variance and the labor efficiency variance?

Yes No

Explanation / Answer

Material variances:

Labor variances:

considering the unfavorable efficiency variance in labor costs, the labor policy followed in not recommonded.

3. variable overhead variances:

3-b:

Yes

There is a relationship, variable overhead is based on direct labor hours. if direct labor hours are more than standard allowed, there will be efficiency variance. in this case Excess hours taken than the standard allowed hours= 3400-2960= 440 hours.

Same number of hours is used in calculating efficiency variances. DIrect labor @12.6 per hour= 440*12.6= 5544

Variable overhead efficiecny variance= 440* 8.5= 3740

they change in the same proportion based on the actual labor hours.

Standard quantity required for actual tests Particulars Blood test Smear Total Total tests         1,500           4,400           5,900 Plates required per test                 3                   3                   3 Standard quantity required         4,500        13,200        17,700 Actual quantity used for actual tests performed: Units Value Per unit Purchased 22000 52800 2.4 Less: Closing inventory 3400 8160 2.4 Actual quantity used 18600 44640 2.4

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