Marc Goudreau, administrator of Clearwater Hospital, was puzzled by the prior months reports. Every month, its anyones guess whether the lab will show a prot or a loss. Perhaps the only answer is to increase our lab fees again.

We cant, replied Rhoda Groves, the controller. There are still a lot of complaints about the last increase, particularly from the insurance companies and government health units. Theyre now paying only about 80% of what we bill. Im beginning to think the problem is on the cost side.

To determine if the Clearwater lab costs are in line with those of other hospital labs, Goudreau has asked you to evaluate the costs for the past month. Groves has provided you with the following information:

1. Two basic types of tests are performed in the labsmears and blood tests. During the past month, 2,700 smears and 900 blood tests were performed in the lab.

2. Small glass plates are used in both types of tests. During the past month, the hospital purchased 16,000 plates at a cost of $38,400. This cost is net of a 4% purchase discount. A total of 2,000 of these plates were unused at the end of the month; no plates were on hand at the beginning of the month.

3. During the past month, 1,800 hours of labour time were used in performing smears and blood tests. The cost of this labour time was $18,450.

4. The labs variable overhead cost last month totalled $11,700.

5. Fixed overhead cost last month totalled $10,400.

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

Plates: Three plates are required per lab test. These plates cost $2.50 each and are disposed of after the test is completed.

Labour: 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 $12 per hour.

Overhead: Overhead cost is based on direct labour-hours. The average rate of variable overhead is $6 per hour. The average rate of xed overhead is $8 per hour. These rates are based on a denominator activity level of 1,250 hours per month.

Required:

1. Compute the materials price variance for the plates purchased last month, and compute a materials quantity v efciency variances. Is there any relationship between the variable overhead efciency variance and the labour efciency variance? Explain. 4. Compute the xed overhead budget and volume variances.ariance for the plates used last month.

2. a. Compute a labour rate variance and a labour efciency variance for the lab.

b. In most hospitals, three-quarters of the workers in the lab are certied technicians and one-quarter are assistants. In an effort to reduce costs, Clearwater Hospital employs only one-half certied technicians and one-half assistants. Would you recommend that this policy be continued? Explain.

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

4. Compute the xed overhead budget and volume variances.

CLEARWATER HOSPITAL Number of smears 2,700 Number of blood tests 900 Number of plates purchased 16,000 Cost of plates $ 38,400 Quantity discount allowed 4% Unused plates at month beginning -0- Unused plates at month end 2,000 Labour hours used 1,800 Cost of labour hours $ 18,450 Variable overhead costs $11,700 Fixed overhead cost $ 10,400 Nationwide averages: Number of plates per test 3 Cost per plate 2.50 Time for smear (hours) 0.30 Time for blood test (hours) 0.60 Average cost of lab time per hour $ 12.00 Variable overhead rate per hour $ 6.00 Fixed overhead rate per hour* $ 8.00 *Based on denominator activity level of 1,250 hours per month