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Data P10-1: John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in the hospital's lab. Charges for lab tests
Data P10-1: | ||||||||||||||||||||||
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, payment 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, 1800 | ||||||||||||||||||||||
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 $28,200. This cost is net of a 6% quantity discount. 1,500 of these plates | ||||||||||||||||||||||
were unused at the end of the moth; 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 $13,800. | ||||||||||||||||||||||
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 nation wide 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. | ||||||||||||||||||||||
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 $14 per hour. | ||||||||||||||||||||||
Overhead: Overhead cost is based on direct labor-hours. The average rate for variable overhead is $6 per | ||||||||||||||||||||||
hour. | ||||||||||||||||||||||
Much of the information above is summarized below: | ||||||||||||||||||||||
VALLEY VIEW HOSPITAL | ||||||||||||||||||||||
Number of blood tests | 1,800 | |||||||||||||||||||||
Number of smears | 2,400 | |||||||||||||||||||||
Number of plates purchased | 12,000 | |||||||||||||||||||||
Cost of plates | $28,200 | |||||||||||||||||||||
Quantity discount allowed | 6% | |||||||||||||||||||||
Unused plates at month end | 1,500 | |||||||||||||||||||||
Labor hours | 1,150 | |||||||||||||||||||||
Cost of labor hours | $13,800 | |||||||||||||||||||||
Variable overhead costs | $7,820 | |||||||||||||||||||||
Nationwide averages: | ||||||||||||||||||||||
Number of plates per test | 2 | |||||||||||||||||||||
Cost per plate | $2.50 | |||||||||||||||||||||
Time for blood test (hours) | 0.30 | |||||||||||||||||||||
Time for smear (hours) | 0.15 | |||||||||||||||||||||
Average cost of lab time per hour | $14.00 | |||||||||||||||||||||
Variable overhead rate per hour | $6.00 | |||||||||||||||||||||
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: | ||||||||||||||||||||||
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. Compute the variable overhead spending and efficiency variances. Is there any relation between | ||||||||||||||||||||||
the variable overhead efficiency variance and the labor efficiency variance? Explain. | ||||||||||||||||||||||
example
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