value: 15.00 points Problem 10-12 Variance Analysis in a Hospital [LO10-1, L010-
ID: 2460643 • Letter: V
Question
value: 15.00 points Problem 10-12 Variance Analysis in a Hospital [LO10-1, L010-2, LO10-3] 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, 750 blood tests and 3,000 smears were performed in the lab b. Small glass plates are used in both types of tests. During the past month, the hospital purchased 15,000 plates at a cost of $48,450. 2,000 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, 2,000 hours of labor time were recorded in the lab at a cost of $21,600 d. The lab's variable overhead cost last month totaled $15,200 Valley View Hospital has never used standard costs. By searching industry literature, however, you have determined the following nationwide averages for hospital labs Plates: Labor: Overhead: Three plates are required per lab test. These plates cost $3.40 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 $11.20 per hour Overhead cost is based on direct labor-hours. The average rate for variable overhead is $7.10 per hour.Explanation / Answer
1.
The standard Quantity of Plates allowed for tests performed during the month:
Blood Tests = 750
Smears Tests = 3000
Total = 3750
Plates per Test = x 3
Standard Quantity Allowed = 11250
The Variance Allowance for Plates would be:
AP
SP
AQ
Material Price Variance
$3.4
-
$3
x
15000
=
Variance
6000U
AQ
SQ
SP
Material Quantity variance
13000
-
11250
x
3
=
Variance
5250U
1. a.
The standard hours allowed for tests performed during the month
Smears : .40hours x 3000 tests = 1200
Blood tests : .80 Hours x 750 tests = 600
Total = 1800
The Variance Allowance for labor would be:
AR
SR
AH
Labor Rate Variance
$10.8
-
$11.2
x
2000
=
Variance
800F
AH
SH
SR
Labor efficiency variance
2000
-
1800
x
$11.2
=
Variance
2240U
2. b. No, The policy should not be continued . The saving of $.40 per hour by employing more assistants is off set by too much time is taken in performing lab tests as indicated by the unfavorable labor efficiency variance.
2. Variable overhead Variance
AR
SR
AH
Variable Overhead Rate Variance
$7.6
-
$7.1
x
2000
=
Variance
1000U
AH
SH
SR
Variable Overhead efficiency variance
2000
-
1800
x
$7.1
=
Variance
1420U
3.b. Yes, The two variances are related. Both are computed by comparing actual labor hours to standard hours allowed for the output of the period. If there is an un favorable labor efficiency variance there will also be an unfavorable variable overhead efficiency variance.
AP
SP
AQ
Material Price Variance
$3.4
-
$3
x
15000
=
Variance
6000U
AQ
SQ
SP
Material Quantity variance
13000
-
11250
x
3
=
Variance
5250U
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