Variance analysis in a hospital
Peachtree Hospital chief administrator, Chad Matthews, is concerned about the costs in the laboratory, which performs tests for the hospital. Due to increased pressure from insurance companies to reduce costs, the hospital has been encouraging managers in all departments to reduce costs. Currently, insurance companies are willing to pay only about 75% of what the laboratory bills. Although it is common for insurance companies to reduce payments to the "customary and reasonable" amount, last year the laboratory received about 80% of the amount billed. Mr. Matthews has asked you to gather information about the costs of the laboratory so that he can evaluate whether to confront the insurance companies about their stingy reimbursement policies or counsel the laboratory's manager, Louise Grady, about keeping her costs in line. You have gathered 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. These are the only direct materials used in tests. During the past month, the lab purchased 16,000 plates at a cost of $38,400. The cost is net of a 4% purchase discount. 2,000 of these plates were unused as of the end of the month. No plates were on hand at the beginning of the month.
During the month, 1,800 hours of labor time were used in performing smears and blood tests. The cost of this time was $18,450. Labor is hired on an hourly basis.
Peachtree Hospital does not use standard costs. You searched the Internet and were able to obtain the following benchmark data for other hospitals operating in the region:
Three plates are required per lab test, regardless of type. These plates cost on average $2.50 each and are discarded after each use.
Each smear requires 0.3 hours to complete and each blood test requires 0.6 hours to complete. The average cost of this lab time is $12.00 per hour
Questions:
1. Compute the following based on the benchmarks:
A). materials price variance & materials quantity variance (clearly label work and show computations)
B). labor rate variance & labor efficiency variance (clearly label work and show computations)
c). Advise Mr. Matthews regarding whether the insurance companies are being stingy or he needs to counsel Ms. Grady. (maximum one paragraph discussion)