Question

COVID-19 virus is spreading around the world. The management of Hang Seng Lab (HSL) is studying the costs for tests in the lab. HSL has received some complaints because the fees for lab tests are higher than its competitors. HSL has not used standard costs before. After you do the market research, you find the following worldwide averages for labs:

Containers: Four containers are required per lab test. These containers cost $4 each and will not be used again after the test is done.

Labour: Each saliva test should require 0.4 hours to complete, and each stool test should require 0.2 hours to complete. The average cost of this lab time is $20.5 per hour.

Overhead: Overhead cost is based on direct labour-hours. The average rate for variable overhead is $6 per hour.

Other useful information is extracted from HSL as follows:
i. Two types of tests are performed in the lab – saliva tests and stool tests. During the past month, 2,000 saliva tests and 2,700 stool tests were performed in the lab.
ii. Small containers are used in both types of tests. During the past month, the lab purchased 14,000 containers at a cost of $61,880. No container was on hand at the beginning of the month and two thousand of these containers were unused at the end of the month.
iii. The lab’s variable overhead cost last month totaled $12,006.
iv. During the past month, 1,450 hours of labour time were recorded in the lab at a cost of $29,000.

Required:
1. Calculate the materials price variance for the containers purchased last month and the materials quantity variance for the containers used last month (Hint: purchased units are not equal to used units).
2a. Calculate the labour rate variance and the labour efficiency variance.
2b. Almost one-half of the workers in the lab are senior technicians and one-half are assistants in most other labs. HSL employs only one-fifth senior technicians and four-fifths assistants to reduce costs. Would you suggest keeping this scheme? Explain with three reasons (less than 70 words).
3a. Calculate the variable overhead rate and efficiency variances.
3b. Are the variable overhead efficiency variance and the labour efficiency variance related? Explain with two reasons (less than 40 words).

Answer 1

COVID - 19 Virus ( Hang seng Lab )
Variances
MPV = ( SP - AP ) * AQ purchased
MPV = ( 4 -4.42 ) * 14000 = $ 5880 ( unfavourable )	AP = 61880 / 14000 = $ 4.42 per plate
MQV = ( SQ - AQ ) SP
MQV = ( 4700 * 4 - (14000 - 2000) ) * 4 = $ 27200 ( favourable )	2000 + 2700 = 4700
LRV = ( SR - AR ) AH
LRV = ( 20.5 - 20 ) 1450 = $ 725 ( favourable)	AR = 29000 / 1450 = $ 20 per hour
LEV = ( SH - AH ) SR
LEV = ( 2000 * 0.4 + 2700 * 0.2 - 1450 ) 20 = $ 2200 ( unfavourable)
No, I would not recommend that this policy should be continued because employing less skilled
people have resulted in cost savings but on the other hand resulted in poor performance as a result
efficiency variance turned out to be unfavourable and made Overall Labour cost variance
unfavourable.
VOHRV = ( SR - AR ) AH
VOHRV = ( 6 - 8.28 ) * 1450= $ 3306 ( unfavourable )	AR = 12006 / 1450 = $ 8.28 per hour
VOHEV = ( SH - AH ) SR
VOHEV = ( 2000 * 0.4 + 2700 * 0.2 - 1450 ) 6 = $ 660 ( unfavourable))
yes, the number of hours worked and budgeted.