\"What\'s going on in that lab?\" asked Derek Warren, chief administrator for Co
ID: 2415743 • Letter: #
Question
"What's going on in that lab?" asked Derek Warren, chief administrator for Cottonwood 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 Lois Ankers, 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."
To determine if lab costs are in line with other hospitals, Mr. Warren has asked you to evaluate the costs for the past month. Ms. Ankers has provided you with the following information:
Two basic types of tests are performed in the lab—smears and blood tests. During the past month, 3,400 smears and 1,000 blood tests were performed in the lab.
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.
Cottonwood Hospital has never used standard costs. By searching industry literature, however, you have determined the following nationwide averages for hospital labs:
Three plates are required per lab test. These plates cost $3.25 each and are disposed of after the test is completed.
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 $11.6 per hour.
Overhead cost is based on direct labor-hours. The average rate of variable overhead is $7.5 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. (Round your answers to 2 decimal placesIndicate 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. (Round your answers to 2 decimal places.Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)
"What's going on in that lab?" asked Derek Warren, chief administrator for Cottonwood 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
variance Formula Amount comments material price variance Actual qtty (standard price- actual price) 3720.08 favorable material quantity variance Standard Price (Standard qtty -Actual qtty) -4550 Adverse variance Formula Amount comments labour rate variance Actual hours (standard price- actual price) 1440 favorable labour efficiency variance Standard Price (Standard hours -Actual hours) -2784 Adverse Standard information material labour spear blood test total spear blood test total Actual units 3400 1000 4400 3400 1000 4400 Standard quantity PER UNIT 3 3 0.4 0.8 Standard quantity 10200 3000 13200 1360 800 2160 Standard price PER UNIT 3.25 3.25 3.25 11.6 11.6 11.6 Standard cost 33150 9750 42900 15776 9280 25056 Actual information material labour particulars total actual labour cost 26400 Actual quantity Actual labour hours 2400 purchase 17000 labour cost per hour 11 (-) unused units 2400 used plates 14600 Actual cost total cost 53040 (-) discount 2121.6 net cost 50918.4 units of purchse 17000
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