Whats goingo on in that lab? asked Derek Warren, chief administrator for Cottonw
ID: 445647 • Letter: W
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Whats goingo on in that lab? asked Derek Warren, chief administrator for Cottonwood Hospital, as he studied the prior months report. Every mont the lab teeters between a profit and a loss, Are we going to have to increase our lab fees again?
We cant 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 detemine if lab costs are in line with other hospitals, Mr. Warren has asked you to evaluatethe costs for the past month. Ms. Ankers has provided you with the following information.
A) Two basic types of test are performed in the lab-smears and blood tests. During the past month, 2,700 smears and 900 blood tests were performed in the lab.
B) Small glass plates are used in both types of test. During the past month, the hospital purchased 16,000 plates at a cost of $38,400. The cost is net of 4% purchase discount. A total of 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 1800 hours of labor time were used in performing smears and blood tests. The cost of this labor time was $18,540
D) The lab's variable overhead cost last month totaled $ 11,700. Cottonwood Hospital has never used standard cost. By searching industry literature, however, you have determined the following nationwide averages for hospitals labs.
Plates: Three plates are required per lab test. These plates cost $2.50 each are disposed of after the test is completed
Labor: Each smear should require 0.3 hours to complete, and each blood test should require 0.6 hours to complete. The average cost of this lab time is $12 per hour.
Overhead: Overhead cost is based on direct labor-hours. The average rate of variable overhead is $6 per hour.
REQUIRED:
1. compute the materials price variance for the plates purchased last month, and compute a materials quantity variance fo the plates used last month.
2. For labor cost in the lab:
A) Compute a labor rate variance anda labor efficiency variance
B) In most hospitals 3/4 of the workers in the lab are certified technicians and 1/4 are certified technicians. In effort to reduce costs, Cottonwood Hospital employs only one-half certified technicians and one-half assistants. Woud you recommend that this policy be continued? Explain
3) Compute the variable overhead rate and efficiency variances. Is there any relation between the variable overhead efficiency variance and the labor efficiency variance? Explain
Explanation / Answer
Actual
Smears test=2700
Blood test=900
Purchase price of 16000 plates=$38400
Purchase price per unit of plates=38400/16000=$2.4
Unused plates at the end=2000
Cost of 1800 hours of Labor time=$18540
Labor cost per unit hours=18540/1800=$10.3
Lab variable overhed cost=$11700
Standard Cost
No of Plates required per lab test=3
Plates cost per unit=$2.5
Per Smear time=0.3 hours
Per blood test time=0.6 hours
Average cost of lab time per hour=$12
Overhead per hour=$6
1)
Total number of test=Smear test+ blood test=2700+900=3600
No of plates required=3*3600=10800
Material Price variance=(Actual price-Standard Price)*Actual Quantity=(2.4-2.5)*16000=-$1600
Material Quantity variance=(Actual quantity-Standard quantity)*Standard cost per unit
Actual quantity used=16000-2000=14000 plates
Standard quantity=10800
Material Quantity variance=(14000-10800)*2.5=$8000
2)
Total hours of labor required=0.3*2700+0.6*900=1350 hours
Labor rate variance=(Actual rate-Standard rate)*Actual hours worked=(10.3-12)*1800=-3060
Labor Efficiency variance=(Actual hours-Standard hours)*Standard rate=(1800-1350)*12=5400
3)
Variable overhead variance=Actual Overhead-Actual hour*Standard variable overhead per hour
Variable overhead rate variance=11700-1800*6=900
Variable overhead efficiency variance=(Actual hours-Standard hours)*Standard Overhead rate
Variable overhead efficiency variance=(1800-1350)*6=2700
Yes both Variable overhead variance and Labor Efficiency variance is directly proportional to (Actual hours-Standard hours)
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