70.2K

Verified Solution

Link Copied!

Marc Goudreau, administrator of Clearwater Hospital, was puzzledby the prior month’s reports. “Every month, it’s anyone’s guesswhether the lab will show a profit or a loss. Perhaps the onlyanswer is to increase our lab fees again.”

“We can’t,” replied Rhoda Groves, the controller. “There arestill a lot of complaints about the last increase, particularlyfrom the insurance companies and government health units. They’renow paying only about 86% of what we bill. I’m beginning to thinkthe problem is on the cost side.”

To determine if the Clearwater lab costs are in line with thoseof other hospital labs, Goudreau has asked you to evaluate thecosts for the past month. Groves has provided you with thefollowing information:

1. Two basic types of tests are performed in the lab—smears andblood tests. During the past month, 2,100 smears and 1,500 bloodtests were performed in the lab.
2. Small glass plates are used in both types of tests. During thepast month, the hospital purchased 22,000 plates at a cost of$71,808. This cost is net of a 4% purchase discount. A total of1,200 of these plates were unused at the end of the month; noplates were on hand at the beginning of the month.
3. During the past month, 1,760 hours of labour time were used inperforming smears and blood tests. The cost of this labour time was$18,392.00.
4. The lab’s variable overhead cost last month totalled$11,000.
5. Fixed overhead cost last month totalled $14,000.

Clearwater 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. These plates cost $3.40each and are disposed of after the test is completed.
Labour:	Each smear should require 0.3 hours to complete, and each bloodtest should require 0.6 hours to complete. The average cost of thislab time is $12 per hour.
Overhead:	Overhead cost is based on direct labour-hours. The average rateof variable overhead is $6 per hour. The average rate of fixedoverhead is $10 per hour. These rates are based on a denominatoractivity level of 1,250 hours per month.

Required:

1. Compute the materials price variance for theplates purchased last month, and compute a materials quantityvariance for the plates used last month. (Indicate theeffect of each variance by selecting "F" for favorable, "U" forunfavorable, and "None" for no effect (i.e., zerovariance).)

2-a. Compute a labour rate variance and alabour efficiency variance for the lab. (Indicate theeffect of each variance by selecting "F" for favorable, "U" forunfavorable, and "None" for no effect (i.e., zero variance). Do notround intermediate calculation and round your final answers to 1decimal place.)

3-a. Compute the variable overhead spending andefficiency variances. (Indicate the effect of each varianceby selecting "F" for favorable, "U" for unfavorable, and "None" forno effect (i.e., zero variance).)

4. Compute the fixed overhead budget and volumevariances. (Indicate the effect of each variance byselecting "F" for favorable, "U" for unfavorable, and "None" for noeffect (i.e., zero variance).)