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, 1,350 blood tests and 4,100 smears were performed in the lab.

Small glass plates are used in both types of tests. During the past month, the hospital purchased 20,500 plates at a cost of $59,040. 3,100 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, 3,100 hours of labor time were recorded in the lab at a cost of $35,185.

The lab’s variable overhead cost last month totaled $26,970.

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 $3.00 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 $12.30 per hour.

Overhead: Overhead cost is based on direct labor-hours. The average rate for variable overhead is $8.20 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.

2. For labor cost in the lab:

a. Compute a labor rate variance and a labor efficiency variance.

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?

3-a. Compute the variable overhead rate and efficiency variances.

3-b. Is there any relation between the variable overhead efficiency variance and the labor efficiency variance?

Answer 1

1. Material Prize Variance for Plates Purchased last month :

(Actual Quantity * Actual Prize) LESS (Actual Quantity * Standard Prize)

59040 LESS (20500*3) = 2460 Favorable

Material Quantity Variance for Plates used last month

(Actual Quantity Used * Standard Prize) LESS (Standard Quantity to be used * Standard Prize)

(17400*3) LESS (((1350+4100)*3)*3) = 3150 Unfavorable

2.a Labor Rate Variance = (Actual Hour * Actual Rate ) LESS (Actual Hour * Standard Rate)

35185 LESS (3100*12.30) = 2945 Favorable

Labor Efficiency Variance = (Actual Hours * Standard Rate ) LESS (Standard Hours needed * Standard Rate)

(3100*12.30) LESS (((1350*.8)+(4100*.4))*12.3) =

38130 - 33456 = 4674 Unfavorable

2b. If this is bringing any change in rates then of course it should be implemented

3a. Variable OH Rate Variance = (Actual Labor Hours * Actual Rate ) LESS (Actual Hours * Standard Rate)

26970 LESS (3100*8.2) = 1550 Unfavorable

Variable Efficiency Variance : (Actual Hours * Standard Rate ) LESS (Standard Hours to be utilized * Standard Rate)

(3100*8.2) LESS (((1350*.8)+(4100*.4))*12.3)=

25420 LESS 33456 = 8036 Favorable

3b. Yes there is direct relation because if labor efficiency will be good it will impact OH Rate efficiency directly