John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in thehospital’s lab. Charges for lab tests are consistently higher at Valley View than at other hospitals andhave resulted in many complaints. Also, because of strict regulations on amounts reimbursed for labtests, payments received from insurance companies and governmental units have not been high enoughto cover lab costs.Mr. Fleming has asked you to evaluate costs in the hospital’s lab for the past month. The followinginformation is available:a. Two types of tests are performed in the lab—blood tests and smears. During the past month, 1,800 bloodtests and 2,400 smears were performed in the lab.b. Small glass plates are used in both types of tests. During the past month, the hospital purchased12,000 plates at a cost of $28,200. This cost is net of a 6% quantity discount. 1,500 of these plateswere unused at the end of the month; no plates were on hand at the beginning of the month.c. During the past month, 1,150 hours of labor time were recorded in the lab at a cost of $13,800.d. The lab’s variable overhead cost last month totaled $7,820.Valley View Hospital has never used standard costs. By searching industry literature, however, youhave determined the following nationwide averages for hospital labs:Plates: Two plates are required per lab test. These plates cost $2.50 each and are disposed of after the testis completed.Labor: Each blood test should require 0.3 hours to complete, and each smear should require 0.15 hours tocomplete. The average cost of this lab time is $14 per hour.Overhead: Overhead cost is based on direct labor-hours. The average rate for variable overhead is $6 perhour.Required:1. Compute a materials price variance for the plates purchased last month and a materials quantityvariance for the plates used last month.2. For labor cost in the lab:a. Compute a labor rate variance and a labor efficiency variance.b. In most hospitals, one-half of the workers in the lab are senior technicians and one-half areassistants. In an effort to reduce costs, Valley View Hospital employs only one-fourth seniortechnicians and three-fourths assistants. Would you recommend that this policy be continued?Explain.3. Compute the variable overhead rate and efficiency variances. Is there any relation between the variableoverhead efficiency variance and the labor efficiency variance? Explain.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in the
hospital’s lab. Charges for lab tests are consistently higher at Valley View than at other hospitals and
have resulted in many complaints. Also, because of strict regulations on amounts reimbursed for lab
tests, payments received from insurance companies and governmental units have not been high enough
to cover lab costs.
Mr. Fleming has asked you to evaluate costs in the hospital’s lab for the past month. The following
information is available:
a. Two types of tests are performed in the lab—blood tests and smears. During the past month, 1,800 blood
tests and 2,400 smears 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 $28,200. This cost is net of a 6% quantity discount. 1,500 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, 1,150 hours of labor time were recorded in the lab at a cost of $13,800.
d. The lab’s variable
Valley View Hospital has never used
have determined the following nationwide averages for hospital labs:
Plates: Two plates are required per lab test. These plates cost $2.50 each and are disposed of after the test
is completed.
Labor: Each blood test should require 0.3 hours to complete, and each smear should require 0.15 hours to
complete. The average cost of this lab time is $14 per hour.
Overhead: Overhead cost is based on direct labor-hours. The average rate for variable overhead is $6 per
hour.
Required:
1. Compute a materials price variance for the plates purchased last month and a materials quantity
variance for the plates used last month.
2. For labor cost in the lab:
a. Compute a labor rate variance and a labor efficiency variance.
b. In most hospitals, one-half of the workers in the lab are senior technicians and one-half are
assistants. In an effort to reduce costs, Valley View Hospital employs only one-fourth senior
technicians and three-fourths assistants. Would you recommend that this policy be continued?
Explain.
3. Compute the variable overhead rate and efficiency variances. Is there any relation between the variable
overhead efficiency variance and the labor efficiency variance? Explain.
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