Lab, Inc., a private clinic which specializes on smears and blood tests, has just come from a meeting with Derek Warren, chief administrator for Unfavorable Lab located in Cottonwood, a city in the neighbor state. Peter explained to their supervisor that Mr. Warren found an ideal scheme for direct labor force to be used in medical labs, which is a ratio of three-fourth certified technicians to one-fourth of assistants (for example, if they have 16 persons of direct labor staff, 12 of them must be certified technicians and 4 of them must be assistants). According to Mr. Warren this policy is a golden rule to minimize direct labor costs; moreover, it is followed by most of the hospitals.

In addition, Peter heard from one his colleague that other hospitals purchase cheaper glass plates (which are used in labs to prepare tests) and that they can decrease their costs by purchasing cheaper plates rather than those expensive ones they purchase from their German supplier. Brian Welsh, the supervisor of Unfavorable Labs, has replied that although German plates are more expensive there is lower possibility of them to be broken because they are made of hardened glass.

Peter and Brian have asked you to determine if lab costs for the past month are in line with other labs. Ms. Chambers, the Unfavorable Lab's accountant, has provided you with the following information:

a.Two basic types of tests are performed in the lab - smears and blood tests. During the past month, 3'800 smears and 1'400 blood tests were performed in the lab.

b.Small glass plates are used in both types of tests. During the past month, the hospital purchased 16'200 plates at a cost of $40'000. This cost is net of a 4% quantity discount. A total of 1'000 of these plates were still on hand unused at the end of the month; there were 1'000 plates on hand at the beginning of the month. The cost of plates with the German supplier was agreed upon for the whole year, and thus there was no change in cost per plate between months.

c.During the past month, 1'800 hours of labor time were used in performing smears and blood tests. The cost of this labor was $17'900.

d.Variable overhead cost last month in the lab for utilities and supplies totaled $12'000.

Unfavorable Lab has never used standard costs. By searching industry literature, however, you have determined the following nationwide averages for hospital labs:

Plates: Taken into account that plates may be broken during test, usually 3 plates are required per lab test. These plates cost $2.60 each and are disposed of after the test is completed.

Labor: Each smear should require 0.3 hours to complete, and each blood test should require 0.6 hours to complete. The average cost of this lab time is $8,5 per hour.

Overhead: Overhead cost is based on the direct labor-hours. The average rate of variable overhead is $7 per hour.

Peter and Brian would like a complete analysis of the cost of plates, labor, and variable overhead in the lab for the last month so that they can determine if costs in the lab are indeed out of line.

Required:

1.Compute the materials price variance for the plates purchased last month, and compute the materials quantity variance for the plates used last month. Would you recommend that the company switches from German plates to the cheaper alternative? Explain.

2.For labor cost in the lab:

a.Compute a labor rate variance and a labor efficiency variance.

b.In most hospitals, three-fourth of the workers in the lab are certified technicians and one-fourth are assistants. Unfavorable Lab employs only certified technicians. Would you recommend that Unfavorable Lab switches from their "certified technicians only" scheme to the 3to1 scheme proposed by Mr. Warren? Explain.

3.Compute the variable overhead spending and efficiency variances. Is there any relationship between the variable overhead spending variance and the labor efficiency variance? Explain.