Case Analysis - Sunquest Labs

Case Analysis: SunQuest Labs

1. Prepare the analysis of cost variations between 2006 and 2007 requested by Mr. Gillinov.

2. Should the lab manager be commended or criticized for cost center performance?

An analysis of the cost variations proves that there could be various reasons for unfavorable variances from 2006 to 2007. The testing materials show an unfavorable variance of $5,000, but this may have been a direct result of price increases in the testing kits and an increase in CBC units sold. Direct labor also shows an unfavorable variance of $154,000. However, wages increased from an average of $16.25 per hour to $20.03 per hour. Moreover, additional sales of CBC units require more labor ultimately increasing the total cost of direct labor. The direct labor and direct material unfavorable variances are out of the control of the lab manager.

Since Lab Overhead, both variable and fixed, are allocated costs a comparison was performed of projected costs using a standard rate and actual costs. In 2006 the variable overhead rate was projected to be $2.50 per direct labor hour and in 2007 the rate was projected to be $2.00 per direct labor hour. Since the actual unit sales of CBC and CMP tests were also the project sales numbers a projected number of direct labor hours were calculated at 28,000 and 30,400 hours for 2006 and 2007, respectively. Using these numbers a budgeted amount of $70,000 and $60,800 was provided for 2006 and 2007, respectively. However, actual costs show that variable costs totaled $84,740 and $63,490 for 2006 and 2007, respectively. In 2006 the fixed overhead rate was projected to be $5.00 per direct labor hour and in 2007 the rate was projected to be $6.00 per direct labor hour. Again, since the actual unit sales of CBC and CMP tests were also the project sales