P9–7 Hospital; basic variance analysis Time allowed: 45 minutes John Fleming, chief administrator for Valley View Hospital, is concerned about 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 provide an acceptable level of profit for the lab.

Mr Fleming has asked you to evaluate costs in the hospital’s lab for the past month. The following information is available:

1 Basically, 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 £28,200. This cost is net of a 6% quantity discount. Some 1,500 of these plates were still on hand unused at the end of the month; there were no plates on hand at the beginning of the month.

3 During the past month, 1,150 hours of labour time were recorded in the lab. The cost of this labour time was £13,800.

4 Variable overhead cost last month in the lab for utilities and supplies totalled £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 £2.50 each and are disposed of after the test is completed.

Mr Fleming would like a complete analysis of the cost of plates, labour and overhead in the lab for the last month so that he can get to the root of the lab’s cost problem.
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 labour cost in the lab:

(a) Compute a labour rate variance and a labour 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-quarter senior technicians and three-quarters assistants. Would you recommend that this policy be continued? Explain.
3 Compute the variable overhead spending and efficiency variances. Is there any relationship between the variable overhead efficiency variance and the labour efficiency variance? Explain.

Transcribed Image Text:

Plates: Labour: Overhead: Two plates are required per lab test. These plates cost 2.50 each and are disposed of after the test is completed. 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 cost is based on direct labour-hours. The average rate for variable overhead is 6 per hour.