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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, payment 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, 1800
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 moth; 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 you have
determined the following nation wide 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
Much of the information above is summarized below:
VALLEY VIEW HOSPITAL
Number of blood tests
Number of smears
Number of plates purchased
Cost of plates
Quantity discount allowed
Unused plates at month end
Cost of labor hours
Variable overhead costs
Number of plates per test
Cost per plate
Time for blood test (hours)
Time for smear (hours)
Average cost of lab time per hour
Variable overhead rate per hour
1. Compute a materials price variance fo...
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