John Fleming, chief administrator for Valley View Hospital, is concerned about t
ID: 2467916 • 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:
Two types of tests are performed in the lab—blood tests and smears. During the past month, 1,800 blood tests and 2,400 smears were performed in the lab.
Small glass plates are used in both types of tests. During the past month, the hospital purchased 12,000 plates at a cost of $28,200. 1,500 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, 1,150 hours of labor time were recorded in the lab at a cost of $13,800.
Two plates are required per lab test. These plates cost $2.50 each and are disposed of after the test is completed.
Each blood test should require 0.3 hours to complete, and each smear should require 0.15 hours to complete. The average cost of this lab time is $14 per hour.
Overhead cost is based on direct labor-hours. The average rate for variable overhead is $6 per hour.
Compute a materials price variance for the plates purchased last month and a materials quantity variance for the plates used last month. (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).)
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).)
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?
Compute the variable overhead rate and efficiency variances. (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).)
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.
Explanation / Answer
1/.
MATERIAL PRICE VARIANCE = ACTUAL QUANTITY USED(ACTUAL PRICE - STANDARD PRICE)
ACTUAL QUANTITY USED= 12000 - 1500
=10500 PLATES
ACTUAL PRICE= $28200 / 12000
$2.35
STANDARD PRICE=$2.50
SO MATERIAL PRICE VARIANCE=10500 * ($2.35 - $2.50)
=1575 U
MATERIAL QUANTITY VARIANCE=STANDARD COST PER UNIT (ACTUAL USAGE UNITS - STANDARD USAGE UNITS)
STANDARD COST PER UNIT & ACTUAL USAGE IN UNITS CALCULATED ABOVE
STANDARD USAGE UNITS= TOTAL ACTUAL TESTS * 2 PLATES PER TASTE
=(1800+2400) * 2
=8400 PLATES
SO MATERIAL QUANTITY VARIANCE= $2.50(10500 - 8400)
=$5250 F
2/A/
LABOUR RATE VARIANCE=ACTUAL HOUR WORKED(ACTUAL RATE - STANDARD RATE)
ACTUAL HOUR WORKED= 1150 HOUR
ACTUAL LABOUR RATE PER HOUR=ACTUAL LABOUR COST / ACTUAL LABOUR HOUR WORKED
=$13800 / 1150
=$12
STANDARD LABOUR RATE PER HOUR= $14
SO LABOUR RATE VARIANCE= 1150($12 -$14)
=2300 U
LABOUR EFFICIENCY VARIANCE= STANDARD LABOUR HOUR RATE(ACTUAL LABOUR HOUR - STANDARD LABOUR HOUR)
STANDARD LABOUR HOUR RATE= $14
ACTUAL HOUR=1150 HOUR
STANDARD LABOUR HOUR= ACTUAL NO OF TEST ( STANDARD TIME FOR TEST)
=(1800+2400)(0.3+0.15)
=1890 HOUR
SO LABOUR EFFICIENCY VARIANCE= $14(1150 -1890)
=$10360 U
3/A
VARIABLE OVERHEAD RATE VARIANCE=ACTUAL HOUR WORKED( STANDARD RATE - ACTUAL RATE)
STANDARD RATE= $6
ACTUAL RATE= ACTUAL VARIABLE OVERHEAD / ACTUAL LABOUR HOUR
=$7820 /1150
=$6.8
ACTUAL HOUR WORKED=1150 HOUR
SO VARIABLE OVERHEAD RATE VARIANCE=1150($6 - $6.8)
=$920 U
VARIABLE OVERHEAD EFFICIANCY VARIANCE= STANDARD OVERHEAD RATE(ACTUAL HOUR WORKED - STANDARD HOUR WORKED)
STANDARD OVERHEAD RATE= $6
ACTUAL HOUR WORKED= 1150 HOUR
STANDARD HOUR= NO OF TEST * TIME FOR EACH TEST
=(1800+2400) * (0.3+0.15)
=1890 HOUR
SO VARIABLE OVERHEAD EFFICIANCY VARIANCE= $6(1150-1890)
=$4440 U
SORRY I DON'T KNOW THE ANSWER OF QUESTION 2.B
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