Chapter 10, Problem 12P

PROBLEM 10-12 Variance Analysis in a HospitalLO10−1, LO10−2, LO10−3
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in the hospital's lab. Charges for lab tests are consistently higher at Valley View 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.
Mr. Fleming has asked you to evaluate costs in the hospital's lab for the past month. The following information is available:

1. 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.
2. Small glass plates are used in both types of tests. During the past month, the hospital purchased 12,000 plates at a cost of 556,400.1,500 of these plates were unused at the end of the month: no plates were on hand at the beginning of the month.
3. During the past month, 1,150 hours of labor time were recorded in the lab at a cost of $21,850.
4. The lab’s variable overhead cost last month totaled $7,820.

Valley View Hospital 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 $5.00 each and are disposed of after the test is completed.
Labor: Each blood test should required 0.3 hours to complete, and each smear should require 0.15 hours to complete. The average cost of this lab time is $20 per hour.
Overhead: Overhead cost is based on direct labor-hours. The average rate for variable overhead is $6 per hour.
Required:

1. Compute a materials price variance for the plates purchased last month and a materials quantity variance for the plates used last month.
2. For labor cost in the lab:
1. Compute a labor rate variance and a labor efficiency variance.
2. 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, Valley View Hospital employs only one-fourth senior technicians and three-fourths assistants. Would you recommend that this policy be continued? Explain.
3. Compute the variable overhead rate and efficiency variance. Is there any relation between the variable overhead efficiency variance and the labor efficiency variance? Explain.

To determine

To compute:

1. Material price variance for the plates purchased last month
2. Material quantity variance for the plates used last month

Answer to Problem 12P

Solution:

1. Material price variance for the plates purchased last month = $ 3,150 F
2. Material quantity variance for the plates used last month = - $ 10,500

Explanation of Solution

Direct Material Variances − Given,

• Actual Plates Used = 10,500 (i.e. 12,000 plates − 1,500 plates left)
• Standard plates per lab test = 2 plates
• Standard price per plate = $ 5 per plate
Actual price per plate = $ 4.70 (i.e. $\frac{\$56,400}{12,000plates}$
• )
• Number of tests performed = 1,800 Blood test and 2,400 smears test
• Standard quantity = 8,400 plates i.e. −

  $\left(1,800bloodtestsX2platespertest\right)+\left(2,400smearsX2pertest\right)=8,400plates$

Direct Material price Variance −

  $\begin{array}{l}DirectMaterialCostVariance=\left(StandardCost–ActualCost\right)XActualQuantity\hfill \\ DirectMaterialCostVariance=\left(\$\text{ 5 }-\$\text{ 4}.7\right)X\text{ 10,500 plates) }\hfill \\ DirectMaterialCostVariance=\$\text{ 3,150 F}avorable\hfill \end{array}$

Direct Material efficiency variance −

  $\begin{array}{l}DirectMaterialEfficiencyVariance=\left(StandardQuantity–ActualQuantity\right)XStandard\text{ Price}\hfill \\ DirectMaterialEfficiencyVariance=\left(\text{ 8,400}–\text{ 10,500}\right)X\$5per\text{ plate}\hfill \\ \hfill \\ DirectMaterialEfficiencyVariance=-\$\text{ 10},500Unfavorable\hfill \end{array}$

Conclusion

Thus, the material efficiency and price variances have been calculated.

To determine

1. To compute:
Labor rate variance

Labor efficiency variance

2. To discuss about the policy mentioned

Answer to Problem 12P

Solution:

1. The variances are −
Labor rate variance = $ 1,150 F

Labor efficiency variance = - $ 5,000 U

2. The policy can be continued if the efficiency of the lab assistants can be increased.

Explanation of Solution

The above answers can be explained as under −

a. Labor variances −

Given,

• Actual Hours Used = 1,150
• Standard hours per blood test = 0.3 hours
• Standard hours per smear test = 0.15 hours
• Standard rate per hour = $ 20 per hour
• Actual price per plate = $ 19 (i.e. $\frac{\$21,850}{1,150hours}$)
• Number of tests performed = 1,800 Blood test and 2,400 smears test
• Standard quantity = 8,400 hours i.e. −

  $\left(1,800bloodtestsX\text{ 0}\text{.3 hours }pertest\right)+\left(2,400smearsX\text{ 0}\text{.15 hour }per\text{ test}\right)=\text{ 9}00\text{ hour}s$

Direct Labor Rate Variance −

$\begin{array}{l}\text{Direct }LaborRateVariance=\left(StandardRate–Actual\text{ Rate}\right)XActual\text{ Hours}\hfill \\ \text{Direct }LaborRateVariance=\left(\$\text{ 20 }-\$\text{ 19}\right)X\text{ 1,150}\hfill \\ \text{Direct }LaborRateVariance=\$\text{ 1,150 F}avorable\hfill \end{array}$

Direct Labor efficiency variance −

$\begin{array}{l}DirectLaborefficiencyvariance=\left(Standard\text{ Hours }–Actual\text{ Hours}\right)XStandard\text{ Rate}\hfill \\ DirectLaborefficiencyvariance=\left(\text{ 900 hours}–\text{ 1,15}0\text{ Hours}\right)X\$20per\text{ Hour}\hfill \\ DirectLaborefficiencyvariance=\left(\text{900 Hours }–\text{ 1,150 Hours}\right)X\$\text{ 20 }per\text{ Hour}\hfill \\ DirectLaborefficiencyvariance=\text{ - }\$\text{ 5},000\text{ Unf}avorable\hfill \end{array}$

b. The policy to keep 25 % senior technician and 75% assistants, has resulted in a favourable rate variance but unfavourable efficiency variance. The total labor variance is $ 3,850 unfavorable. If the efficiency of assistants can be increased, the efficiency variance can be decreased.

If it can be assured that, the increased efficiency of assistants can decrease the efficiency variance, then the policy can be continued for future. Otherwise, it should not be continued.

Conclusion

Thus, both the parts of the requirement 2 has been answered.

To determine

To compute:

1. Variable overhead rate variance
2. Variable overhead efficiency variance

Answer to Problem 12P

Solution:

1. Variable overhead rate variance = $ 920 U
2. Variable overhead efficiency variance = $ 1,500 U

Explanation of Solution

1. Variable Overhead price variance −

$Variableoverheadcostvariance=\left(StandardCost\text{ X }Actual\text{ Quantity}\right)\text{ - }ActualVariableoverhead$

Given,

• Actual variable overhead = $ 7,820
• Standard rate= $ 6 per hour
• Actual direct labor Hours = 1,150 hours

$\begin{array}{l}Variableoverheadcostvariance=\left(StandardCost\text{ X }Actual\text{ Quantity}\right)\text{ - }ActualVariableoverhead\\ Variableoverheadcostvariance=\left(\$\text{ 6 }X\text{ 1,150 }hours\right)–\$\text{ 7,820}\\ Variableoverheadcostvariance=\text{ - }\$\text{ 920 Unf}avorable\end{array}$

2. Variable overhead efficiency variance −

$Variableoverheadefficiencyvariance=\left(StandardQuantity–ActualQuantity\right)XStandardRate$

Given,

• Standard direct labor hours = 900 hours
• Actual direct labor hours = 1,150 hours
• Standard rate= $ 6 per hour

$\begin{array}{l}Variableoverheadefficiencyvariance=\left(StandardQuantity–ActualQuantity\right)XStandardRate\\ Variableoverheadefficiencyvariance=\left(\text{900 }hours–\text{ 1,15}0hours\right)X\$\text{ 6 }perhour\\ Variableoverheadefficiencyvariance=\text{ - }\$\text{ 1,500 Unf}avorable\end{array}$

Conclusion

Thus, the variable rate and efficiency variance have been calculated.