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:
a. Two types of tests are performed in the lab—blood tests and smears. During the past month, 1,300 blood tests and 4,000 smears were performed in the lab.
b. Small glass plates are used in both types of tests. During the past month, the hospital purchased 20,000 plates at a cost of $79,800. 3,000 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, 3,000 hours of labor time were recorded in the lab at a cost of $33,900.
d. The lab’s variable overhead cost last month totaled $25,800.

Valley View 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 $4.20 each and are disposed of after the test is completed.
Labor: Each blood test should require 0.8 hours to complete, and each smear should require 0.40 hours to complete. The average cost of this lab time is $12.20 per hour.
Overhead: Overhead cost is based on direct labor-hours. The average rate for variable overhead is $8.10 per hour.

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

Answer 1

Answer:

Material Price Variance= $3570 Favorable

Material Quantity Variance= $4620 Unfavorable

Explanation:

Valley View Hospital

Actual number of Plates purchased :  20 ,000

Actual number of Plates used: 17000

Actual price paid per plate : $ 3.99

Standard price per plate : $ 4.20

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

Material Price Variance= ($3.99 *17000)-($4.20 *17,000)= $ 67830- $ 71400

Material Price Variance= $3570 Favorable

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

Material Quantity Variance=($4.20 *17000)-($4.20 *5300* 3)=($4.20 *17000)-($4.20 *15900)

Material Quantity Variance=$ $ 71400-66780= 4620

Material Quantity Variance= $4620 Unfavorable

Total direct materials variance for oil for June= $3570 Favorable  - $4620 Unfavorable = $ 1o50 Unfavorable