Dr. Mirwais Amiri, chairman of the Amiri Medical Complex (AMC), is concerned about the costs for tests in the hospital’s lab. Charges for lab tests are consistently higher at AMC 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. Dr. Amiri 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, 1,800 blood tests and 2,400 smears were performed in the lab. Small glass plates are used in both types of tests. During the past month, the hospital purchased 12,000 plates at a cost of $28,200. 1,500 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, 1,150 hours of labor time were recorded in the lab at a cost of $13,800. The lab’s variable overhead cost last month totaled $7,820. AMC has never used standard costs. By searching industry literature, however, you have determined the following nationwide averages for hospital labs: Plates: Two plates are required per lab test. These plates cost $2.50 each and are disposed of after the test is completed. Labor: Each blood test should require 0.3 hours to complete, and each smear should require 0.15 hours to complete. The average cost of this lab time is $14 per hour. Overhead: Overhead cost is based on direct labor-hours. The average rate for variable overhead is $6 per hour. Required: 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, AMC employs only one-fourth senior technicians and three-fourths assistants. Would you recommend that this policy be continued? Explain. Compute the variable overhead rate and efficiency variances. Is there any relation between the variable overhead efficiency variance and the labor efficiency variance? Explain.

Dr. Mirwais Amiri, chairman of the Amiri Medical Complex (AMC), is concerned about the costs for tests in the hospital’s lab. Charges for lab tests are consistently higher at AMC 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. Dr. Amiri 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, 1,800 blood tests and 2,400 smears were performed in the lab. Small glass plates are used in both types of tests. During the past month, the hospital purchased 12,000 plates at a cost of $28,200. 1,500 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, 1,150 hours of labor time were recorded in the lab at a cost of $13,800. The lab’s variable overhead cost last month totaled $7,820. AMC has never used standard costs. By searching industry literature, however, you have determined the following nationwide averages for hospital labs: Plates: Two plates are required per lab test. These plates cost $2.50 each and are disposed of after the test is completed. Labor: Each blood test should require 0.3 hours to complete, and each smear should require 0.15 hours to complete. The average cost of this lab time is $14 per hour. Overhead: Overhead cost is based on direct labor-hours. The average rate for variable overhead is $6 per hour. Required: 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, AMC employs only one-fourth senior technicians and three-fourths assistants. Would you recommend that this policy be continued? Explain. Compute the variable overhead rate and efficiency variances. Is there any relation between the variable overhead efficiency variance and the labor efficiency variance? Explain.

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Dr. Mirwais Amiri, chairman of the Amiri Medical Complex (AMC), is concerned about the costs for tests in the hospital’s lab. Charges for lab tests are consistently higher at AMC 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.

Dr. Amiri 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, 1,800 blood tests and 2,400 smears were performed in the lab.
Small glass plates are used in both types of tests. During the past month, the hospital purchased 12,000 plates at a cost of $28,200. 1,500 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, 1,150 hours of labor time were recorded in the lab at a cost of $13,800.
The lab’s variable overhead cost last month totaled $7,820.

AMC has never used standard costs. By searching industry literature, however, you have determined the following nationwide averages for hospital labs:

Plates: Two plates are required per lab test. These plates cost $2.50 each and are disposed of after the test is completed.

Labor: Each blood test should require 0.3 hours to complete, and each smear should require 0.15

hours to complete. The average cost of this lab time is $14 per hour.

Overhead: Overhead cost is based on direct labor-hours. The average rate for variable overhead is $6 per hour.

Required:

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, AMC employs only one-fourth senior technicians and three-fourths assistants. Would you recommend that this policy be continued? Explain.
Compute the variable overhead rate and efficiency variances. Is there any relation between the variable overhead efficiency variance and the labor efficiency variance? Explain.

Definition Definition System of assigning an estimated cost to the product (instead of the actual cost) so that the product cost can be determined well in advance and the pricing of the product can be done on time. Since the actual cost cannot be predicted at the initial stage of the production process, the estimated cost is recorded in the books. Any deviation of the estimated cost of the actual cost is adjusted in the books at the end of the period.

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