#481 Marc Goudreau, the administrator of Clearwater

Marc Goudreau, the administrator of Clearwater - Accounting

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Marc Goudreau, the 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 are now paying only about 80% 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:

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

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.

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

The lab's variable overhead cost last month totaled $11,700.

The fixed overhead cost last month totaled $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.

Required:

Compute the Materials Price Variance for the plates purchased last month, and compute a Materials Quantity Variance for the plates used last month.

For Labour Cost in the lab:

Compute a Labour Rate Variance and a Labour Efficiency Variance.

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

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Answer:-

1. Standard Price per plate = $2.50

Actual Price per plate = 38400/16000

= $ 2.4

Material Price Variance = (Standard Price- Actual Price) * Actual Quantity

= ( 2.5-2.4) *16000

= $ 1600 (Favourable)

Actual Quantity of Plates used for Test = 16000 - 2000

= 14000

Standard Quantity = (2700+900) * 3

= 10800

Material Quantity Variance = (Standard Quantity - Actual Quantity) * Standard Rate

= (10800-14000) * 2.5

= $ 8000 (Adverse)

Labour Cost:-

Standard Rate = $ 12 per hour

Actual Rate = 18450/1800

= $ 10.25

Labour Rate Variance = (SR- AR) * Actual Hours

= (12 - 10.25) * 1800

= $ 3150 ( F)

Standard Labour Hours = (2700 * 0.3) + (900 * 0.6)

= 1350 Hours

Labour Efficiency Variance = (Standard Hours - Actual Hours ) * Standard Rate

= (1350 -1800) * 12

= $ 5400 ( Adverse)

Recommendation:-

No, we will not recommend this policy because if we employ one-half certified technicians and one-half assistants which is not correct as per the policies of the Hospitals as followed by most of the hospitals and also if we reduce certified technicians, this will have a negative impact on the Hostial's image from the view point of Customer's health. However reduction in the number of certified technicians will have an impact on cost reduction, so we will evaluate the net impact of this policy by considering the public and the working time allowed by certified technicians towards patients.