1.

Compute a materials price variance for the plates purchased

last month and a materials quantity variance for the plates
used last month
Solution:
Standard quantity of plates allowed for tests performed during the
month would be:
For Blood tests
For Smears
Total Plates
Plates Used per test
So, the Standard quantity
allowed

1,800
2,400
4,200
2
8,400

Lets start the variance analysis for plates:

Actual Quantity of
Input, at Actual
Price
(AQ AP)

Actual Quantity
of Input, at
Standard Price

Standard Quantity
Allowed for
Output, at
Standard Price
(SQ SP)
8,400 plates
$2.50 per plate
= $21,000

(AQ SP)
12,000 plates*
$2.50 per plate
= $30,000
$28,200 (Given)

Price Variance,
$1,800 F
10,500 plates $2.50 per plate =
$26,250

Quantity Variance,
$5,250 U
*Hospitals Purchased 12000 plates. Each plate cost $2.50

Second Method: The variances can be computed using the

formulas:
Materials price variance = actual quantity purchased x
difference
between actual and standard
costs per unit of input purchased

Materials price variance = AQ (AP SP)

12,000 plates ($2.35 per plate* $2.50 per plate)
= $1,800 Favorable.
*$28,200 12,000 plates = $2.35 per plate.
The Material Price Variance is favorable because the actual price
purchased is lower than the standard costs.
(b) Materials quantity variance = difference between
actual quantity used and standard quantity allowed x
standard cost per unit
Materials quantity variance = SP (AQ SQ)
$2.50 per plate (10,500 plates 8,400 plates)
= $5,250 Unfavorable.
The material quantity variance is unfavorable because the actual
quantity used is higher than the standard quantity allowed.
We must note that :
1) All the price variance is due to the hospitals 6% quantity
discount.
2) The $5,250 quantity variance for the month is equal to 25%
of the standard cost allowed for plates.

2. For labor cost in the lab:

a. The standard hours allowed for tests performed during the
month would be:
For Blood tests: 0.3 hour per test 1,800
tests
For Smears: 0.15 hour per test 2,400
tests
So, Total standard hours allowed

540 hours
360 hours
900 hours

The variance analysis would be:

Actual Hours of
Input, at the
Actual Rate

Standard Hours
Actual Hours of
Allowed for Output,
Input, at the
at the Standard
Standard Rate
Rate
(AH AR)
(AH SR)
(SH SR)
1,150 hours
900 hours
$14.00 per hour
$14.00 per hour
= $16,100
= $12,600
$13,800(Given)

Rate Variance,
Efficiency Variance,
$2,300 F
$3,500 U
Total Variance,
$1,200 U

Second Method: The variances can be computed using the

formulas:
Labor rate variance = actual hours worked x difference
between
actual cost per hour and standard
cost per
hour
Labor rate variance = AH (AR SR)
1,150 hours ($12.00 per hour* $14.00 per hour)
= $2,300 Favorable

*$13,800 1,150 hours = $12.00 per hour

Labor rate variance is favorable because the actual cost per hour
is lower than the standard cost per hour.
Labor efficiency variance = difference between actual
hours worked and standard hours allowed per hour x
standard cost
Labor efficiency variance = SR (AH SH)
$14.00 per hour (1,150 hours 900 hours)
= $3,500 Unfavorable
Labor efficiency variance is unfavorable because the actual hours
worked are higher than the standard quantity allowed.
b. In most hospitals, one half of the workers in the lab are senior
technicians and one-half are assistants. In an effort to reduce
costs, Valley View Hospital employs only one- fourth senior
technicians and three fourths assistants. Would you recommend
that this policy be continued? Explain
Solution :
The Hospital should not continue this . As we can observe
that, the hospital is saving $2 per hour by employing more
assistants than senior technicians. But, this savings ( $2300)
is more than offset by other factors. When more assistants
are employed, the time taken in performing the lab test is
too much. This is indicated by the large unfavorable labor
efficiency variance. And, the material required for tests is
more. So, the hospitals unfavorable quantity variance for
plates is due to the inadequate supervision of assistants in
the lab.

3. Compute the variable overhead spending and efficiently

variances. Is there any relation between the variable overhead
efficiency variance and the labor efficiency variance? Explain.
Solution:
The variable overhead variances follow:
Actual Hours of
Input, at the
Actual Rate

Standard Hours
Actual Hours of
Allowed for
Input, at the
Output, at the
Standard Rate
Standard Rate
(AH AR)
(AH SR)
(SH SR)
1,150 hours
900 hours
$6.00 per hour
$6.00 per hour
= $6,900
= $5,400
$7,820(Given)

Rate Variance,
Efficiency Variance,
$920 U
$1,500 U
Total Variance,
$2,420 U

Second Method: Variances can be computed using the formulas:

Variable overhead spending variance = actual hours
worked x
difference between
actual cost
per hour and standard
cost per
hour

Variable overhead rate variance = AH (AR SR)

1,150 hours ($6.80 per hour* $6.00 per hour)
= $920 Unfavorable
*$7,820 1,150 hours = $6.80 per hour
For the variable overhead spending variance, the result is
unfavorable because the actual cost per hour is higher than the
standard cost per hour

Variable overhead efficiency variance = difference

between
actual hours
worked and
standard hours
allowed per
hour x standard
cost
Variable overhead efficiency variance = SR (AH SH)
$6.00 per hour (1,150 hours 900 hours)
= $1,500 Unfavorable
Variable overhead efficiency variance is unfavorable because the
actual hours worked is higher than the standard quantity
allowed.
The two variances are closely related. Since, both are computed
by comparing actual labor time to the standard hours allowed
for the output of the period. Thus, if the labor efficiency
variance is favorable (or unfavorable), then the variable
overhead efficiency variance will also be favorable (or
unfavorable).
The above result shows that variable overhead efficiency variance
and the labor efficiency variance are in the unfavorable
position for the hospital. This can be due to the fact that the

assistants need more time to complete the lab

tests. Therefore, they will incur higher lab variable overhead
expenses.

*2.*

*Perverse Affects of Some Performance Measures*

Complete the following exercise and provide a recommendation for each of the
four scenarios presented. There is often more than one way to improve a
performance measure. Unfortunately, some of the actions taken by managers
to make their performance look better may actually harm the organization. For
example, suppose the marketing department is held responsible only for
increasing the performance measure "total revenues," Increases in total
revenues may be achieved by working harder and smarter, but they can also
usually be achieved by simply cutting prices. The increase in volume from
cutting prices almost always results in greater total revenues; however, it does
not always lead to greater total profits. Those who design performance
measurement systems need to keep in mind that managers who are under
pressure to perform may take actions to improve performance measures that
have negative consequences elsewhere.

For each of the following situations, describe actions that managers might take to show improvement in the
Performance measure but which do not actually lead to improvement in the organization's overall performance.
1. Concerned with the slow rate at which new products are brought to market, top management of a
consumer

Electronics company introduces a new performance measure--speed-to-market. The research and

development department is given responsibility for this performance measure, which measures
the average amount of time a product is in development before it is released to the market for sale.

Solution :
Speed to- market can be improved by taking on less ambitious projects. Rather
than, the company spends great deal of time and effort working on major product
innovations without enough regard to what will be accepted in the market, R & D
might choose to work on small, incremental improvements in existing products. When
products in development are pushed out the door i.e. released too early, before
adequate market testing, consumer feedback, and possible redesigns for
improvement, will lead to decrease performance. The company should adhere to
necessary steps that must be completed before products are released to the market.
R&D should find the degree of market acceptance of the product for some months of
the product release.
1. The CEO of a telephone company has been under public pressure from city officials to fix the large
number of public pay phones that do not work. The company's repair people complain that the problem
is vandalism and damage caused by theft of coins from coin boxes--particularly in high-crime areas in
the city. The CEO says she wants the problem solved and has pledged to city officials that there will be
substantial improvement by the end of the year. To ensure that this is done, she makes the managers
in charge of installing and maintaining pay phones responsible for increasing the percentage of public
pay phones that are fully functional.

Solution :
When the manager uses rations or percentages as the performance measures, the
result may not be acceptable, since, to increase the performace measure, the
manager may try to either increase the numerator or decrease the denominator. In
case when the manager tried to decrease the denominator (which actually
happened), the managers may limit the pay telephones out of the high-risk areas.
Managers could install fewer telephones, making easier to maintain small number of
phones but it will reduce the actual number of phones available. This eliminated the
problem for the managers, but was not what the CEO or the city officials had
intended. They wanted the phones fixed, not eliminated. To avoid this, the managers
should add a performance objective that fixes the number of phone installed and the
minimum number of phones that should be installed within each of the geographic
areas served.

3.
A manufacturing company has been plagued by the chronic failure to
ship orders to customers by the promised date. To solve this problem,
the production manager has been given the responsibility of
increasing the percentage of orders shipped on time. When a
customer calls in an order, the production manager and the customer
agree to a delivery date. If the order is not completed by that date, it

is counted as a late shipment.

Solution :
The production manager decides on the delivery date after taking a lot of cushion time for
the delivery to take place and avoid late shipment. But in real life, the production manager is
increasing the delivery cycle time eg. Instead of the delivery time of four weeks, the
manager promises to deliver in six weeks. This increase in delivery cycle time would
displease customers and they will try to look for alternative vendors and it would take some
business away, but it will improve the percentage of orders delivered on time. The manager
should establish standard delivery times for each product type and measure performances
on those standards. Planning and Scheduling Departments should be given the
responsibility of some of the products which require more delivery times.

4.
Concerned with the productivity of employees, the board of
directors of a large multinational corporation has dictated that the
manager of each subsidiary will be held responsible for increasing
the revenue per employee of his or her subsidiary.
Solution :
To, increase the revenue per employee, the manager of each subsidiary , who is under
pressure, will find it easier to
1) Reduce the number of employees in the subsidiary, as it would drive up revenuer per
employee. But it will reduce total revenues and total profits ( till the percentage
decline in revenues is less than the percentage cut in number of employees).
2) Managers may reduce employees in non-revenue-generating departments that are
essential for long-term health of the company (eg. R&D, Forecasting, Planning, Labor
Relations, etc.)
Suppose, for example, that a manager is responsible for business units with a total of 1,000
employees, $120 million in revenues, and profits of $2 million. Further suppose that a
manager can eliminate one of these business units that has 200 employees, revenues of
$10 million, and profits of $1.2 million.

Total revenue
Total employees
Revenue per employee
Total profits

Before eliminating After eliminating

the business unit the business unit
$120,000,000
$110,000,000
1,000
800
$120,000
$137,500
$2,000,000
$800,000

Thus, we can see that the company should select the performance measure with great deal

of care and managers should also not place too much emphasis on any one performance
measure.
Instead the company should redefine the revenue-per-employee goals of each subsidiary.
The board of directors should develop appropriate productivity goals for each subsidiary in
every department (For example: manufacturing productivity, number of new products
introduced, number of new customers acquired, etc.)