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:

1. Two types of tests are performed in the lab—blood tests and smears. During the past month, 1,500 blood tests and 4,400 smears were performed in the lab.

2. Small glass plates are used in both types of tests. During the past month, the hospital purchased 22,000 plates at a cost of $52,800. 3,400 of these plates were unused at the end of the month; no plates were on hand at the beginning of the month.

3. During the past month, 3,400 hours of labor time were recorded in the lab at a cost of $39,100.

4. The lab’s variable overhead cost last month totaled $30,600.

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 $2.50 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 $12.60 per hour.

Overhead: Overhead cost is based on direct labor-hours. The average rate for variable overhead is $8.50 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. (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, Compute a labor rate variance and a labor efficiency variance. (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. Compute the variable overhead rate and efficiency variances. (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.)

Answer 1

Total tests	5900		=1500+4400
Standard plates	17700		=5900*3
Actual plates	18600		=22000-3400
Standard hours	2960		=(1500*0.8)+(4400*0.4)
1
Materials price variance	2200	F	=52800-(22000*2.5)
Materials quantity variance	2250	U	=2.5*(18600-17700)
2
Labor rate variance	3740	F	=39100-(3400*12.6)
Labor efficiency variance	5544	U	=12.6*(3400-2960)
3
Variable overhead rate variance	1700	U	=30600-(3400*8.5)
Variable overhead efficiency variance	3740	U	=8.5*(3400-2960)