John Fleming, chief administrator for Valley View Hospital, is concerned about t
ID: 341256 • 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: a. Two types of tests are performed in the lab-blood tests and smears. During the past month, 900 blood test:s and 3,300 smears were performed in the lab. b. Small glass plates are used in both types of tests. During the past month, the hospital purchased 16,500 plates at a cost of $35,640. 2,300 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, 2,300 hours of labor time were recorded in the lab at a cost of $25,185. d. The lab's variable overhead cost last month totaled $18,170 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 $2.25 each and are disposed of after the test is completed Labor: Each blood test should require 0.6 hours to complete, and each smear should require 0.30 hours complete. The average cost of this lab time is $11.50 per hour Overhead: Overhead cost is based on direct labor-hours. The average rate for variable overhead is $7.40 per hour.Explanation / Answer
Solution 1:
Actual quantity of plates purchased = 16500 plates
Total cost of plates = $35,640
Price per plate = $35,640 / 16500 = $2.16 per plate
Actual quantity of plates used (AQ) = 16500 - 2300 = 14200 Plates
Standard Quantity of plates (SQ) = (900+3300)*3= 12600 plates
Standard price of plates (SP) = $2.25 per plate
Material Price Variance = (SP - AP) * Actual quantity of material purchased = ($2.25 - $2.16) * 16500 = $1,485F
Material Qty variance = (SQ - AQ)* SP = (12600 - 14200) *$2.25 = $3,600 U
Solution 2A:
Actual hours of labor (AH) = 2300
Actual rate of labor (AR) = $25,185 / 2300 = $10.95 per hour
Standard hours of labor (SH) = (900*0.6) + (3300*0.3) = 1530 hours
Standard rate of labor (SR) = $11.50 per hour
Labor rate variance = (SR - AR)* AH = ($11.50 - $10.95) * 2300 = $1,265 F
Labor Efficiency Variance = (SH - AH) * SR = (1530 - 2300) * $11.50 = $8,855 U
Solution 2B:
Labor efficiency variance of Valley view hospital is unfavorable, the main reason for unfavorable variance is that the hospital is using only one fourth senior technicians and three fourth assistant while as per standard practice, one half senior technicians and one half assistants are required. Therefore Valley hospital should disconitnue this policy and employe for senior technicians to improve labor efficiency and overall labor cost variance.
Solution 3A:
Actual hours of labor (AH) = 2300
Actual rate of variable overhead (AR) = $18,170 / 2300 = $7.90 per hour
Standard hours of labor (SH) = (900*0.6) + (3300*0.3) = 1530 hours
Standard rate of variable overhead (SR) = $7.40 per hour
Variable overhead rate variance = (SR - AR)* AH = ($7.40 - $7.90) * 2300 = $1,150 U
Variable overhead Efficiency Variance = (SH - AH) * SR = (1530 - 2300) * $7.40 = $5,698
Solution 3B:
As variable overhead are based on direct labor hours, therefore there is relation between variable overhead efficiency variance and labor efficiency variance. If direct labor efficiency variance improve, variable overhead efficiency variance will automatically improve.
Hence these variance are positvely corelated.
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