Marc Goudreau, administrator of Clearwater Hospital, was puzzled by the prior mo
ID: 2554287 • Letter: M
Question
Marc Goudreau, administrator of Clearwater Hospital, was puzzled by the prior month 's reports. "Every month, it's anyone's guess whether the lab will show a profit or a loss. Perhaps the only answer is to increase our lab fees again." We can't," 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. They're now paying only about 84% of what we bill. I'm 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 a. Two basic types of tests are performed in the lab-smears and blood tests. During the past month 3,000 smears and 1,500 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 12,000 plates at a cost of $34,104. This cost is net of a 2% purchase discount. A total of 1,800 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, 2,100 hours of labour time were used in performing smears and blood tests. The cost of this labour time was $28,770.00 d. The lab's variable overhead cost last month totalled $11,200 e. Fixed overhead cost last month totalled $18,000 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 $2.90 each and are disposed of after Labour: Each smear should require 0.3 hours to complete, and each blood test should require 0.6 hours Overhead: Overhead cost is based on direct labour-hours. The average rate of variable overhead is $5 per the test is completed to complete. The average cost of this lab time is $15 per hour hour. The average rate of fixed overhead is $12 per hour. These rates are based on a denominator activity level of 1,000 hours per mont Required 1. Compute the materials price variance for the plates purchased last month, and compute a materials quantity variance for the plates used last month. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance.) Materials price variance Materials quantity varianceExplanation / Answer
1 Material Variance A 3 plates for every test both types formula for material quantity variance MQV= (SQ-AQ)SP for 4500 tests ((4500*3) - 10200)*2.90 9570 Favourable Note plates bougt 12000 Less : un used 1800 Net actual usage 10200 B actual rate per plate discounted price for 12000 plates is 34104 therefore gross rate 34104/98% per plate rate actual 34800/12000 2.9 Net Rate after discount 2.9-(2.9*2%) 2.842 Formula for material price variances (SP-AP)*AQ (2.9-2.842)*10200 591.6 Favourable 2 Labour Variances A Labour efficiency Variance or hour variance standard hour qty rate samear 3000 0.3 900 blood 1500 0.6 900 1800 Formula (SH-AH)SP (1800-2100)*15 4500 Adverse B Labour Rate Variance Actual Rate 28770/2100 13.7 Formula (SR-AR)*AH (15-13.7)*2100 2730 Favourable 3 Variable OH Variances A Spending Variances overheads absorbed on the basis of labour hour calculation of rate of standard variable OH for 1000 hours rate is 5 therefor 1800 standard hours rate will be 9 (5*1800/1000) ((AH*AR) - (SH*SR)) (2100*13.7)-(1800*9) 12570 Favourable B Efficiency Variance (AH-SH)SR (2100-1800)9 2700 Adverse 4 Fixed OH variances A FOH Budhet Variance Actual Fixed OH - Budgeted Fixed OH 18000-( 1800*18) 0 no change B FH Volume Variance (Budgeted Hours - Actual Hours) Budgeted Rate (1800-2100)*18 5400 Adverse