John Fleming, chief administrator for Valley View Hospital, is concerned about t

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 f payments received from insurance companies and governmental units have not been high enough to cover lab costs Fleming has asked you to evaluate costs in the hospital's lab for the past month. The following information is available e Two ypes 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 b Small glass plates are used in both types of tests. During the past month the hospital purchased plates at a cost of $28,200. 1.500 of these plates were unused at the end of the month. no plate hand at the beginning of the month. 9 c. During the past month, 1,150 hours of labor time were recorded in d The lab's variable overhead cost last month totaled $7,820 the lab at a cost of $13.800 Valley View Hospital has never used standard costs. By searching industry literature, however, you hav determined the following nationwide averages for hospital labs: 9 2 Plates Two plates are required per lab test. These plates cost $2 50 each and are disposed of after Labor Over the test is completed Each blood test should require 0 3 hours to complete. and each smear shouid require 0.15 hours to complete The average cost of this lab time is $14 per hour heed Overhead cost is based on drect labor-hours The average rate for variable overhead is $6 per Required: als price variance for the plates purchased last month and a materials sed last month, (Onput all amounts as pos or un ne" for no

Explanation / Answer

Blood Test Smears Total Test Done               1,800           2,400                             4,200 Direct Materials Plate Required - Standard per test                       2                   2                                      2 SQ - Total Standard Plates required               3,600           4,800                             8,400 SR per Plate (in $)                 2.50             2.50                                2.50 AQ - Plates (12,000 - 1,500)                           10,500 AR (per Plate)                                2.35 ($28,200 / 12,000) Direct Labor SH per test                 0.30             0.15 SH (Total)             540.00         360.00                           900.00 SR               14.00           14.00                             14.00 AH                       1,150.00 AR                             12.00 ($13,800 /1,150 ) Answer 1. Material Price Variance = (SR - AR) X AQ Purchased. Material Price Variance = ($2.50 - $2.35) X 12,000 Plates Material Price Variance = $1,800 (F) Material quantity Variance = (SQ - AQ) X SR Material quantity Variance = (8,400 Plates - 10,500 Plates) X $2.50 Material quantity Variance = $5,250 (U) Answer 2-a. Labor Rate Variance = (SR - AR) X AH Labor Rate Variance = ($14 - $12) X 1,150 hrs Labor Rate Variance = $2,300 (F) Labor Efficiency Variance = (SH - AH) X SR Labor Efficiency Variance = (900 hrs - 1,150 hrs) X $14 Labor Efficiency Variance = $3,500 (U)

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