Question

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: (i) 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. (ii) 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. (iii) During the past month, 1,150 hours of labor time were recorded in the lab at a cost of 13,800 . (iv) The lab's variable overhead cost last month totaled 7,820 . Valley View Hospital has never used standard costs. By searching industry literature, however, you have determined the following nationwide averages for hospital labs: Plates: Two plates are required per lab test. These plates cost 2.50 the following and are disposed of after the test is completed. Labor: Each blood test should require 0.3 hours to complete, and the following 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.

(a) Compute a materials price variance for the plates purchased last month and a materials quantity variance for the plates used last month.

Answer 1

The materials price variance is $1,800 favorable, indicating the actual price paid per plate is less than the standard cost. The materials quantity variance is $5,250 unfavorable because more plates were used than the standard required for the tests performed.

Step-by-step explanation:

To calculate the materials price variance for the plates, we need to know the standard cost per plate and the actual cost per plate. The standard cost is $2.50 per plate, as given in the industry averages. The hospital, however, paid $28,200 for 12,000 plates, which means they paid $2.35 each after the 6% discount. Hence, the materials price variance is:

• (Standard Price - Actual Price) x Actual Quantity
• (2.50 - 2.35) x 12,000 plates
• $0.15 x 12,000 plates = $1,800 favorable

The materials quantity variance looks at the amount of plates used versus what should have been used. Since two plates are required per test, the standard quantity of plates needed for 1,800 blood tests and 2,400 smears is (1,800 tests + 2,400 tests) x 2 plates/test = 8,400 plates. We know that 12,000 plates were purchased and 1,500 remained, meaning 10,500 were used. The materials quantity variance is:

• (Standard Quantity - Actual Quantity) x Standard Price
• (8,400 plates - 10,500 plates) x $2.50
• -2,100 plates x $2.50 = $5,250 unfavorable

This indicates the hospital used more plates than the standard, therefore incurring additional costs.