Question & Answer: ts are consistently higher at Valley View than at other…..

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:

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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 $56,400. 1,500 of these plates were unused at the end of the month; no plates were on hand at the beginning of the month.

During the past month, 1,150 hours of labor time were recorded in the lab at a cost of $21,850.

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 require 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.


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:

a. Compute a labor rate variance and a labor efficiency variance.

b. 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?

3-a. Compute the variable overhead rate and efficiency variances.

3-b. Is there any relation between the variable overhead efficiency variance and the labor efficiency variance?

Expert Answer


1. Materials Price Variance for the plates purchased last month:

= Actual Quantity x Actual Price – Actual Quantity x Standard Price

= $ 56,400 – (12,000 x $5)

= 3,600 Favorable

Materials Quantity Variance for the plates used last month:

= ( Actual Quantity – Standard Quantity) x Standard Price

= (10,500 – 8,400) x $ 5

= 10,500 Adverse

Actual Quantity used = 12,000 – 1,500 = 10,500

Standard Quantity = (1800 + 2400) x 2 = 8,400

2. a. Labor Rate Variance:

= Actual Quantity x Actual Rate – Actual Quantity x Standard Rate

= $ 21,850 – (1150 x $20)

= 1,150 Favorable

Labor Efficiency Variance:

= Actual Hours x Standard Rate – Standard Hours x Standard Rate

= (1150 x $20) – [(1800 x 0.3) + (2400 x 0.15)] x $20

= 5,000 Adverse

2. b. Continuation of this policy is not recommended for Valley View Hospital. Jobs with assistants cannot be done as effectively as jobs with senior technicians. This is evident from the Material Quantity Variance and Labor Efficiency Variance, both of which are Adverse. Although the Hospital may have saved some costs on the labor rate (which is favorable) due to lower cost of assistants, it is not enough to cover all the adverse variances.

3.a. Variable Overhead Rate Variance:

= Actual Variable Overheads Expenditure – Actual hours x Standard Variable Overhead Rater per hour

=$ 7,820 – (1150 x $6)

= 920 Adverse

Variable Overhead Efficiency Variance:

= Standard hours x Standard Variable overhead rate per hour (-) Actual hours x Standard variable overhead rate per hour

=[(1800 x 0.3) + (2400 x 0.15)] x $6 (-) 1150 x $6

= (900 – 1150) x $6

= 1500 Adverse

3.b. Both Variable Overhead Efficience Variance and Labor Efficiency Variance are Adverse. The relation between both is the higher number of assistants, who take more time to complete the tests. Hence the reason for the higher costs.

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