2. For labor costs 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-forth senior technicians and three-fourths assistants. Would you recommend that this policy be continued?
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: a. 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. b. 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. c. During the past month, 1,150 hours of labor time were recorded in the lab at a cost of $21,850. d. 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. 2. a. The standard hours allowed for tests performed during the month would be: Blood tests: 0.3 hour per test x 1,800 tests. ...... 540 hours Smears: 0.15 hour per test x tests hours Total standard hours allowed hours The variance analysis would be: Actual Hours of Input, at the Actual Hours of Input, Actual Rate at the Standard Rate (AH X AR) (AH ~ SR) hours x $20.00 per hour $ Standard Hours Allowed for Output, at the Standard Rate (SH X SR) 900 hours x $. $ per hour = = Labor efficiency Labor rate variance, variance, $1,150 F $. U Spending variance, $ U = - = Alternatively, the variances can be computed using the formulas: Labor rate variance AH (AR SR) 1,150 hours ($19.00 per hour* $20.00 per hour) = $1,150 F *$21,850 = 1,150 hours = $19.00 per hour Labor efficiency variance SR (AH SH) $20.00 per hour ( hours 900 hours) = $_U = b. The policy probably should not be continued. Although the hospital is saving $__ per hour by employing more assistants than senior technicians, this savings is more than offset by other factors. Too much time is being taken in performing lab tests, as indicated by the large unfavorable labor efficiency variance. And, it seems likely that most (or all) of the hospital's unfavorable quantity variance for plates is traceable to inadequate supervision of assistants in the lab
