Variance analysis

Grafton Hospital is concerned about the costs of laboratory tests which are consistently higher at Grafton Hospital than at other hospitals. Due to strict regulations on amounts which can be charged by the hospital for laboratory tests, receipts have not been high enough to cover the costs of the laboratory.

The chief administrator has asked you to evaluate costs in the hospital's laboratory for the past month. The following information is available:

1. Two types of tests are performed in the laboratory - blood tests and urine tests. During the past month, 1,800 blood tests and 2,400 urine tests were performed in the laboratory.

2. Small glass plates are used in both types of tests. During last month, the hospital purchased 12,000 plates at a total cost of 28,200. 1,500 of these plates were still on hand unused at the end of the month; there were no plates on hand at the beginning of the month.

3. During last month, 1,150 hours of labour time were recorded in the laboratory. The cost of this labour time was 13,800.

4. In most hospitals, one-half of the workers in the laboratory are senior technicians and one-half are assistants. In an effort to reduce costs, Grafton Hospital employs only onequarter senior technicians and three-quarters assistants.

5. Variable overhead costs last month in the laboratory totaled 7,820.

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

Plates: Two plates are required per laboratory test. These plates should cost 2.50 each and are disposed of after the test is completed.

Labour: Each blood test should require 0.3 hours to complete, and each urine test should require 0.15 hours to complete. The average cost of this laboratory time is 14 per hour.

Overhead: Overhead cost is based on direct labour-hours. The average rate for variable overhead is 6 per hour.

Required: (a) Using the information provided, prepare standard costs for each of the two types of tests provided by the laboratory and calculate all possible variances for last month.

(b) Advise the chief administrator of areas which should be investigated as a result of the variances you have calculated.

(c) Briefly comment on the limitations of the information you have used to create the standard costs.