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

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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: Three plates are required per lab test. These plates cost $3.40 each and are disposed of after the test is completed. Labor: 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: Overhead cost is based on direct labor-hours. The average rate for variable overhead is $7.10 per hour.

Required: 1. 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) Input all amounts as positive values.)

2. For labor cost in the lab:

a. 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) Input all amounts as positive values.)

b. 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? Yes No

3-a. 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) Input all amounts as positive values.)

3-b. Is there any relation between the variable overhead efficiency variance and the labor efficiency variance? Yes No

Explanation / Answer

Blood Tests 750 Smears 3000 Total tests 4200 x 3 plates per test 12600 Material Rate variance Actual Quantity of Input, at Actual Price (AQ x AP) Actual Quantity of Input, at Standard Price (AQ x SP) Varaince 13000*3.23 13000*3.40 41990 44200 -2210 F Efficiency variance, Standard Quantity Allowed for Actual Output, at Standard Price (SQ x SP) Actual Quantity of Input, at Standard Price (AQ x SP) Varaince 12600*3.40 13000*3.40 42840 44200 -1360 UF hour/test Blood Tests 750 0.8 600 Smears 3000 0.4 1200 1800 Labor Rate variance Actual Hours of Input, at Actual Rate (AH x AR) Actual Hours of Input, at Standard Rate (AH x SR) Varaince 21600 2000*11.20 21600 22400 -800 F Efficiency variance, Standard Hours Allowed for Actual Output, at Standard Rate (SH x SR) Actual Hours of Input, at Standard Rate (AH x SR) Varaince 1800*11.20 2000*11.20 20160 22400 -2240 UF It is not recommend to continue to the policy of employing only one-fourth senior technicians and three-fourths assistants. The reason for that is that despite being able to save $2 per hour from the standard rate, we can see that the efficiency is affected. The efficiency variance is at $3500 as opposed to the rate variance of $2300, which gives a net unfavoriable variance for labor of $1200. This means that it takes longer time for the hospital to process the blood tests and smears compared to employing one-half of senior technicians and one half of assistants in their manpower. Overhead variance Rate variance Actual Hours of Input, at Actual Rate (AH x AR) Actual Hours of Input, at Standard Rate (AH x SR) 15200 2000*7.10 Varaince 15200 14200 1000 UF Efficiency variance, Standard Hours Allowed for Actual Output, at Standard Rate (SH x SR) Actual Hours of Input, at Standard Rate (AH x SR) 1800*7.10 12780 14200 -1420 UF There is a relation between the variable overhead efficiency variance and the labor efficiency variance because both of them are computed by comparing the actual labor hours to the standard hours. Hence if the labor efficiency variance is favorable, then the variable overhead efficiency variance will also be favorable. Likewise will happen when it is unfavorable.

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