John Fleming, chief administrator for Valley View Hospital, isconcerned about the costs for tests in the hospital’s lab. Chargesfor lab tests are consistently higher at Valley View than at otherhospitals and have resulted in many complaints. Also, because ofstrict regulations on amounts reimbursed for lab tests, paymentsreceived from insurance companies and governmental units have notbeen high enough to cover lab costs.
Mr. Fleming has asked you to evaluate costs in the hospital’slab for the past month. The following information is available:
- Two types of tests are performed in the lab—blood tests andsmears. During the past month, 1,350 blood tests and 4,100 smearswere performed in the lab.
Small glass plates are used in both types of tests. During thepast 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 recordedin 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 searchingindustry literature, however, you have determined the followingnationwide averages for hospital labs:
Plates: Three plates are required per lab test. Theseplates cost $3.00 each and are disposed of after the test iscompleted.
Labor: Each blood test should require 0.8 hours tocomplete, and each smear should require 0.40 hours to complete. Theaverage 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 purchasedlast month and a materials quantity variance for the plates usedlast month.
2. For labor cost in the lab:
a. Compute a labor rate variance and a labor efficiencyvariance.
b. In most hospitals, one-half of the workers in the lab aresenior technicians and one-half are assistants. In an effort toreduce costs, Valley View Hospital employs only one-fourth seniortechnicians and three-fourths assistants. Would you recommend thatthis policy be continued?
3-a. Compute the variable overhead rate and efficiencyvariances.
3-b. Is there any relation between the variable overheadefficiency variance and the labor efficiency variance?
