“What’s going on in that lab?” asked Kevin Brolsma, chief administrator for Cinc
ID: 2777143 • Letter: #
Question
“What’s going on in that lab?” asked Kevin Brolsma, chief administrator for Cincinnati Hospital, as he studied the prior month’s reports. “Every month the lab teeters between a profit and a loss. Are we going to have to increase our lab fees again?”
“We can’t,” replied Jessica Duffy, the controller. “We’re getting lots of complaints about the last increase, particularly from the insurance companies and governmental 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.”
Small glass plates are used in both types of tests. During the past month, the hospital purchased 17,000 plates at a cost of $53,040. This cost is net of a 4% purchase discount. A total of 2,400 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, 2,400 hours of labor time were used in performing smears and blood tests. The cost of this labor time was $26,400.
Cincinnati Hospital has never used standard costs. By searching industry literature, however, you have determined the following nationwide averages for hospital labs:
Each smear should require 0.4 hours to complete, and each blood test should require 0.8 hours to complete. The average cost of this lab time is $11.60 per hour.
Overhead cost is based on direct labor-hours. The average rate of variable overhead is $7.50 per hour.
Compute the materials price variance for the plates purchased last month, and compute 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).)
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).)
In most hospitals, three-fourths of the workers in the lab are certified technicians and one-fourth are assistants. In an effort to reduce costs, Cincinnati Hospital employs only one-half certified technicians and one-half assistants. Would you recommend that this policy be continued?
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).)
Is there any relation between the variable overhead efficiency variance and the labor efficiency variance?
“What’s going on in that lab?” asked Kevin Brolsma, chief administrator for Cincinnati Hospital, as he studied the prior month’s reports. “Every month the lab teeters between a profit and a loss. Are we going to have to increase our lab fees again?”
Explanation / Answer
Materials Actual Details Amt $ Cost/Plate purchased 3.12 No of plates used in the month 14600 No of smear & blood tests made in the month 4400 Std price /plate 3.25 Std Qty for 4400 tests 13200 Ans 1 a. Material Price variance= Actual qty (Std Price -Actual Price) =14600*(3.25-3.12) =1898F b. Material Quantity Variance = Std Price ( Std Qty-Actual Qty) =3.25(13200-14600) =4550U Details Amt $/Qty hr Ans 2 Actual Labor Hr 2400 Total labor cost 26400 Labor cost/labor hr 11 1344 No of smear & blood tests made in the month 4400 25056 Labor hr/test 0.545 Std labor hrs for 4400 tests 2160 Std labor rate/hr 11.6 a. Labor rate variance= Actual hrs( std labor rate-Actual labor rate) =2400(11.60-11) =1440F Labor efficiency variance= std labor rate (std hrs-actual hrs) =11.60(2160-2400) =2784U b. As the Labor efficiency variance of Cincinati Hospital is unfavoravble compared to national average, the policy of keeping half certified technicians instead of three fourth is not recommended for continuing as a policy 3a. Details Amt $/Qty hr Actual variable OH 19200 Actual labor hr 2400 Variable OH rate/labor hr 8.00 Std labor hrs for 4400 tests 2160 Std variable oH rate /hr 7.5 Var OH rate variance= Actual hrs( std OH rate-Actual OH rate) = 2400(7.5-8) =1200U Var OH efficiency variance= std Var OH rate (std hrs-actual hrs) =7.5(2160-2400) =1800U 3b. Variable OH efficiency variance is influenced by actual labor hrs consumed. Actual labor hrs also affects the Labor efficiency variance. So te labor efficiency and variable OH efficiency variance are related.
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