Valley View Hospital has an outpatient clinic.

Jeffrey Harper, the hospitals chief administrator, is very concerned about cost control and has asked that performance reports be prepared that compare budgeted and actual amounts for medical assistants, clinic supplies and lab tests. Past financial studies have shown that the cost of clinic supplies used is driven by the number of medical assistant labor hours worked, whereas lab tests are highly correlated with the number of patients served. The following information is available for June: * Lab Tests: Actual lab tests for June cost $159,027 and averaged 3.3 per patient. Each patient is anticipated to have three lab tests, an average budgeted cost of $65 per test. * Medical Assistants: Valley Views standard wage rate is $14 per hour, and each assistant is expected to spend 30 minutes with a patient. Assistants totaled 420 hours in helping the 790 patients seen, at an average pay rate of $15.50 per hour. * Clinic supplies: The cost of clinic supplies used is budgeted at $12 per labor hour, and the actual cost of supplies used was $4,575. Required: 1. Prepare a report that shows budgeted and actual costs for the 790 participants served during June. Compute the differences (variances) between these amounts and label them as favorable or unfavorable. Budgeted Lab Tests ($65 per test x 3 x 790) Medical Assistants ($14 per hour x 0.5 x 790) Clinic supplies ($12 per labor hour x 0.5 x 790) 154,050 5,530 4,740 Actual 159,027 6,510 4,575 Difference 4,977 U 980 U 165 F

2. On the basis of your answer to requirement (1), determine whether Valley View Hospital has any significant problems with respect to clinic supplies and lab tests. Briefly discuss your findings. Base on the answer in No. 1, we can determine that Valley View Hospital has significant problems in respect of lab tests because the actual lab test cost has exceeded the budgeted cost by $4,977 while clinic supplies results in a favorable result for Valley View Hospital because the actual cost is less than the budgeted cost. 3. By performing a detailed analysis, determine the spending and efficiency variances for lab tests. Does it appear that Valley View Hospital has any significant problems with the cost of its lab tests? Briefly explain. (Hint: In applying the overhead variance formulas, think of the number of tests as analogous to the number of hours, and think

of the cost per test as analogous to the variable overhead rate.)

Spending variance = actual number of lab tests x difference between actual and standard costs per unit of lab test = 2,607 hours x ($61 - $65) = $10,428 F Efficiency variance = difference between actual quantity x standard cost per unit of used and standard quantity allowed input = [2,607 (3 x 790)] x $65/lab test = 237 x $65/lab test = $15,405 U

4. Compare the lab tests variance computed in requirement (1), a flexible-budget variance, with the sum of the variances in requirement (3). Discuss your findings and explain the relationship of flexible-budget variances and standard cost variances overhead. When we sum both spending and efficiency variances, we will get the same result as the lab tests variance computed in No. 1. $10,428 F + $15,405 U = $4,977 U We can tell that the total flexible budget variance compose of both spending and efficiency variances.