Textbook Problem

Standards for nonmanufacturing expenses for a service company

The Radiology Department provides imaging services for Emergency Medical Center. One important activity in the Radiology Department in transcribing digitally recorded analysis of images into a written report. The manager of the Radiology Department determined that the average transcriptionist could type 700 lines of a report in an hour. The plan for the first week in May called for 81,900 typed lines to be written. The Radiology Department has three transcriptionists. Each transcriptionist is hired from an employment firm that requires temporary employees to be hired for a minimum of a 40-hour week. Transcriptionists are paid $23.00 per hour. The manager offered a bonus if the department could type more lines for the week, without overtime. Due to high service demands, the transcriptionists typed more lines in the first week of May titan planned. The actual amount of lines typed in the first week of May was 88,900 lines, without overtime. As a result, the bonus caused the average transcriptionist hourly rate to increase to $30.00 per hour during the first week in May.

Instructions

1. 1. If the department typed 81,900 lines according to the original plan, what would have been the labor time variance?
2. 2. What was the labor time variance as a result of typing 88,900 lines?
3. 3. What was the labor rate variance as a result of the bonus?
4. 4. The manager is trying to determine if a better decision would have been to hire a temporary transcriptionist to meet the higher typing demands in the first week of May, rather

than paying out the bonus. If another employee was hired from the employment firm, what would have been the labor time variance in the first week?

1. 5. Which decision is better, paying the bonus or hiring another transcriptionist?
2. 6. Are there any performance-related issues that the labor time and rate variances fail to consider? Explain.