Question

Problem 23-5A (Part Level Submission) Hart Labs, Inc. provides mad cow disease testing for both state and federal governmental agricultural agencies. Because the company’s customers are governmental agencies, prices are strictly regulated. Therefore, Hart Labs must constantly monitor and control its testing costs. Shown below are the standard costs for a typical test. Direct materials (2 test tubes @ $1.80 per tube) $3.60 Direct labor (1 hour @ $30 per hour) 30.00 Variable overhead (1 hour @ $7.00 per hour) 7.00 Fixed overhead (1 hour @ $13.00 per hour) 13.00 Total standard cost per test $53.60 The lab does not maintain an inventory of test tubes. As a result, the tubes purchased each month are used that month. Actual activity for the month of November 2017, when 800 tests were conducted, resulted in the following: Direct materials (1,664 test tubes) $2,746 Direct labor (840 hours) 24,360 Variable overhead 5,280 Fixed overhead 10,080 Monthly budgeted fixed overhead is $17,160. Revenues for the month were $52,000, and selling and administrative expenses were $4,100. (a) Your answer is correct. Compute the price and quantity variances for direct materials and direct labor. (Round answers to 0 decimal places, e.g. 5,275.) Materials price variance $ Materials quantity variance $ Labor price variance $ Labor quantity variance $ Click if you would like to Show Work for this question: Open Show Work Show Solution Show Answer Link to Text Link to Text Link to Text Attempts: 1 of 3 used (b) Compute the total overhead variance. Total Overhead variance $

Answer 1

Material price variance

It is the variance arising due the difference in standard price and actual price of material.

Material price variance=(standard price*actual quantity)-(actual price*actual quantity)

Standard price=$1.8 per tube

Actual quantity= 1664 tubes

(Actual price*actual quantity) is the total of actual material cost which is given in the question to be $2746

Material price variance= (1.8*1664)-2746=2995.2-2746= $249.2 (favourable)

Material quantity variance

This variance arises due to the difference between the actual materials used and the standard materials to be used for the actual output.

Material quantity variance= (standard quantity -actual quantity)*standard rate

Standard quantity of tubes for actual output= standard tube per test* actual number of tests= 2*800= 1600 tubes

Actual quantity= 1664 tubes

Standard rate= $1.8 per tube

Material quantity variance= (1600-1664)*1.8= $115.2 (unfavorable)

Labour price variance

It is the variance arising due the difference in the standard labour rate and the actual labour rate. It is also called labour rate variance.

Labour price variance= (standard rate*actual hours)-

(actual rate*actual hours)

Standard rate= $30 per hour

Actual hours=840 hours

(Actual hours*actual rate) is the total actual labour cost which is given in the question to be $24360

Labour price variance= (30*840)-24360= $840(favourable)

Labour quantity variance

Labour quantity Variance is also called labour efficiency variance. This is variance arising due to excess labour hours utilised in comparison to the standard hours required for actual output.

Labour quantity Variance=(standard hours-actual hours)*standard rate

Standard hours for actual output= standard hours per unit*actual units= 1*800= 800 hours

Actual hours=840 hours

Standard rate= $30 per hour

Labour quantity Variance= (800-840)*30= $1200 (unfavorable)

Total Overhead variance

This is the variance arising due to the difference in overheads applied and the actual overheads. This variance actually measures the under/over application of overheads.

Total overhead variance= overhead applied- actual overheads

Overhead applied is the product of budgeted overhead absorption rate and actual hours. Usually labour hours is used to allocate overheads. Since there are variable and fixed overheads, the budgeted overhead absorption rate is the sum of the two.

Budgeted overhead absorption rate=budgeted variable overhead rate+ budgeted fixed overhead rate= 7+13= $20 per hour

Overhead applied= budgeted overhead rate*actual hours= 20*840= $16800

Actual overhead= actual variable overhead+actual fixed overhead= 10080+5280=$15360

Total overhead variance= 16800- 15360= $1440 (favourable)