"What's
going on in that lab?" asked Derek Warren, chief administrator for
Cottonwood Hospital, as he studied the prior month’s reports. "Every
month the lab teeters between a profit and a loss. Are we going to have
to increase our lab fees again?"
"We can't," replied Lois Ankers, the controller. "We're getting
lots of complaints about the last increase, particularly from the
insurance companies and governmental health units. They're now paying
only about 80% of what we bill. I'm beginning to think the problem is on
the cost side."
|
To determine if lab costs are in line with other hospitals, Mr.
Warren has asked you to evaluate the costs for the past month. Ms.
Ankers has provided you with the following information:
|
| a. |
Two
basic types of tests are performed in the lab—smears and blood tests.
During the past month, 3,100 smears and 800 blood tests were performed
in the lab.
|
| b. |
Small
glass plates are used in both types of tests. During the past month,
the hospital purchased 15,500 plates at a cost of $59,520. This cost is
net of a 4% purchase discount. A total of 2,100 of these plates were
unused at the end of the month; no plates were on hand at the beginning
of the month.
|
| c. |
During
the past month, 2,100 hours of labor time were used in performing
smears and blood tests. The cost of this labor time was $22,785.
|
| d. | The lab’s variable overhead cost last month totaled $16,170. |
Cottonwood 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 $4 each and are disposed of after the test is completed.
|
| Labor: |
Each
smear should require 0.4 hours to complete, and each blood test should
require 0.8 hours to complete. The average cost of this lab time is
$11.3 per hour.
|
| Overhead: |
Overhead cost is based on direct labor-hours. The average rate of variable overhead is $7.2 per hour.
|
| Required: |
| 1. |
Compute
the materials price variance for the plates purchased last month, and
compute a materials quantity variance for the plates used last month. (Input
all amounts as positive values. Leave no cells blank - be certain to
enter "0" wherever required. Indicate the effect of each variance by
selecting "F" for favorable, "U" for unfavorable, and "None" for no
effect (i.e., zero variance). Omit the "$" sign in your response.)
|
| Materials price variance | $ | F |
| Materials quantity variance | $ | U |
| 2. | For labor cost in the lab: |
| a. |
Compute a labor rate variance and a labor efficiency variance. (Input
all amounts as positive values. Leave no cells blank - be certain to
enter "0" wherever required. Indicate the effect of each variance by
selecting "F" for favorable, "U" for unfavorable, and "None" for no
effect (i.e., zero variance). Omit the "$" sign in your response.)
|
| Labor rate variance | $ | F |
| Labor efficiency variance | $ | U |
| b. |
In
most hospitals, three-fourths of the workers in the lab are certified
technicians and one-fourth are assistants. In an effort to reduce costs,
Cottonwood Hospital employs only one-half certified technicians and
one-half assistants. Would you recommend that this policy be continued?
|
| No |
| 3a. |
Compute the variable overhead rate and efficiency variances. (Input
all amounts as positive values. Leave no cells blank - be certain to
enter "0" wherever required. Indicate the effect of each variance by
selecting "F" for favorable, "U" for unfavorable, and "None" for no
effect (i.e., zero variance). Omit the "$" sign in your response.)
|
| Variable overhead rate variance | $ | U |
| Variable overhead efficiency variance | $ | U |
| 3b. |
Is there any relation between the variable overhead efficiency variance and the labor efficiency variance?
|
| Yes |
Explanation: 1.
| The standard quantity of plates allowed for tests performed during the month would be: |
| Smears | 3,100 |
| Blood tests | 800 |
| Total | 3,900 |
| Plates per test | ×3 |
| Standard quantity allowed | 11,700 |
| The variance analysis for plates would be: |
| Standard Quantity Allowed for Actual Output, at Standard Price | Actual Quantity of Input, at Standard Price | Actual Quantity of Input, at Actual Price | |||||
| (SQ × SP) | (AQ × SP) | (AQ × AP) | |||||
| 11,700 plates × $4 per plate | 13,400 plates × $4 per plate | ||||||
| = $46,800 | = $53,600 | $59,520 | |||||
Materials quantity
| |||||||
variance = $6,800 U
| |||||||
| 15,500 plates × | |||||||
| $4 per plate | |||||||
| = $62,000 | |||||||
Materials price variance
= $2,480 F | |||||||
Note
that all of the price variance is due to the hospital’s 4% quantity
discount. Also note that the $6,800 quantity variance for the month is
equal to nearly 15% of the standard cost allowed for plates. This
variance may be the result of using too many assistants in the lab.
|
2.
a.
| The standard hours allowed for tests performed during the month would be: |
| Smears: .4 hour per test × 3,100 tests | 1,240 |
| Blood tests: .8 hour per test × 800 tests | 640 |
| Total standard hours allowed | 1,880 |
| The variance analysis of labor would be: |
| Standard Hours Allowed for Actual Output, at Standard Rate | Actual Hours of Input, at Standard Rate | Actual Hours of Input, at Actual Rate | |||||
| (SH × SR) | (AH × SR) | (AH × AR) | |||||
| 1,880 hours × $11.3 per hour | 2,100 hours × $11.3 per hour | ||||||
| = $21,244 | = $23,730 | = $22,785 | |||||
Labor efficiency variance
= $2,486 U |
Labor rate variance
= $945 F | ||||||
Spending Variance = $1,541 U
| |||||||
2.
b.
The
policy probably should not be continued. Although the hospital is
saving $0.45 per hour by employing more assistants relative to the
number of senior technicians than other hospitals, this savings is more
than offset by other factors. Too much time is being taken in performing
lab tests, as indicated by the large unfavorable labor efficiency
variance. And, it seems likely that most (or all) of the hospital's
unfavorable quantity variance for plates is traceable to inadequate
supervision of assistants in the lab.
|
3a.
| The variable overhead variances follow: |
| Standard Hours Allowed for Actual Output, at Standard Rate | Actual Hours of Input, at Standard Rate | Actual Hours of Input, at Actual Rate | |||||
| (SH × SR) | (AH × SR) | (AH × AR) | |||||
| 1,880 hours × $7.20 per hour | 2,100 hours × $7.20 per hour | ||||||
| = $13,536 | = $15,120 | $16,170 | |||||
Variable overhead
efficiency variance = $1,584 U |
Variable overhead
rate variance = $1,050 U | ||||||
Spending variance = $2,634 U
| |||||||
3b.
Yes,
the two variances are related. Both are computed by comparing actual
labor time to the standard hours allowed for the output of the period.
Thus, if there is an unfavorable labor efficiency variance, there will
also be an unfavorable variable overhead efficiency variance.
