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.