Financial and Cost Accounting:

Managerial Accounting for Managers

Problem 11-10 Variance Analysis in a Hospital [L011-1. L011-2, L011-3]

"Wtmt's gOing on in that lab?" asked Derek Warren. chief administrator (or Cotlonwood Hospital. as he

studied the prior month's reporls. "Every month the lab teeters between a profit and a loss. Are we going to

have to increase our lab fees again?"

"We can't," replied Lois Ankers, the ccntroller. "We're getting lots of complaints about the last increase,

particularly from the insurance companies and govemmental health units. They're now paying only about

80% of what we bill. I'm beginning to think the problem is on the cost side."

To determine if lab cosls are in fine .. 'lith other hospitals, Mr. Warren has asked you to evaluate the

costs for the past month. Ms. Ankers has provided you with the following information:

a. Two basic types of tests are performml in the lab-smears and blood tests. During the past month,

3,600 smears and 1.100 blood tesls were performed in the lab.

b. Small glass plates are used in bolh types of testS. During the past month, the hospital purchased 18,000

plates at a cost of $58.140. This cost is net of a 5% purchase discount. A total of 2.600 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. 2,600 hours of labor lime were used in performing smears and blood tests. The

cost of this labor time was $28,860.

d. The lab's variable overhead cost lest month totaled 521,320.

Cottonwood Hospital has never used standard costs. By searching indust!)' literature. hOWever, you

have determined the following nationwide averages for hospital labs'

Plates: Three plates are required per lab test. These plates cost 53.4 each and are disposed of after

the test is completed.

Labar: Each smear should require 0.4 hours to complete. and each blood test should require 0.8

hours to complete. The average cost of this lab time is SI'.8 per hour.

Overhead: Overhead cost is based on direcllabor-hours. The average rate of variable overhead is 57.7

per hour.

Required:

1. Compute the materials price variaflce for the plates purchased last month. and compute a materials

quarltity variance for the plates used last month. (Round your answers to 2 decimal placeslndicate

the effect of each variance by selecting 'F' for favorable, "U" for unfavorable, and "None" for no

effect (i.e., zero variance).)

Standard Price - Actual Price x Actual Quantity

Materials price variance 3.40 3.20 58,140

Variance

11.628

Standard Quantity

58,140

- Actual Quarltity

58.140

x Standard Price '" Variance

Materials quantity variance 3.40

2. For labor cos1 in the lab:

a. Compute a labor rate variance and a labor efficiency variance. (Round your answers to 2 decimal

places. Indicate the effect of each variance by selecting "'F' for favorable, "U" for unfavorable,

and "None" for no effect (i.e., :;:ero variance).}

instructions I help

Labor rate variance

Labor efficiency variance

b. In most hospitals, three-fourths of the workers in the lab are certified technicians and one-fourth are

assistants_ In an effort to reduce costs, Cottonwood Hospital employs only one-half certified

technicians and one.J1alf assistants. Would you recommend thai this policy be continued?

3a. Compute the variable ovemead rate and elficiency variances. (Round your answers to 2 decimal

places. Indicate the effecl of each variance by selecting nF" for favorable, "un for unfavorable,

and "None" for no effect (i,e., zero variance).}

Variable ovemead rate variance

Variable overhead efficiency variance

3b.ls .there any relation between the vanable overhead efficiency variance and the labor efficiency

vanance?

Yes

No

References eBook & Resources

Vanance

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Vanance

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Variance

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:; Variance

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Worksheet Difficulty: Easy Learning Objective: 11-02 Compute the direct labor

efficiency and rate variances alld explain their

significance.

Problem 11-10

Variance Analysis in

a HospItal [L011-1,

L011-2, L011-3J

Learning Objective: 11-01

Compute the direct materialS

quantity and price variances

and explain their

slgnifrcance.

Learning Objective: 11-03 Compute the variabte

manufacturing overllead efficiency and rate variancl;!s and

explain their signtficance.