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 toevaluate costs in the hospital’s lab for the past month. Thefollowing information is available: Two types of tests areperformed in the lab—blood tests and smears. During the past month,700 blood tests and 2,900 smears were performed in the lab. Smallglass plates are used in both types of tests. During the pastmonth, the hospital purchased 14,500 plates at a cost of $54,520.1,900 of these plates were unused at the end of the month; noplates were on hand at the beginning of the month. During the pastmonth, 1,900 hours of labor time were recorded in the lab at a costof $20,425. The lab’s variable overhead cost last month totaled$14,250. Valley View Hospital has never used standard costs. Bysearching industry literature, however, you have determined thefollowing nationwide averages for hospital labs: Plates: Threeplates are required per lab test. These plates cost $4.00 each andare disposed of after the test is completed. Labor: Each blood testshould require 0.8 hours to complete, and each smear should require0.40 hours to complete. The average cost of this lab time is $11.10per hour. Overhead: Overhead cost is based on direct labor-hours.The average rate for variable overhead is $7.00 per hour. Required:1. Compute a materials price variance for the plates purchased lastmonth and a materials quantity variance for the plates used lastmonth. 2. For labor cost in the lab: a. Compute a labor ratevariance and a labor efficiency variance. b. In most hospitals,one-half of the workers in the lab are senior technicians andone-half are assistants. In an effort to reduce costs, Valley ViewHospital employs only one-fourth senior technicians andthree-fourths assistants. Would you recommend that this policy becontinued? 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?
