Question

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 @ $1.00 per tube) $2.00 Direct labor (1 hour @ $32 per hour) 32.00 Variable overhead (1 hour @ $6.00 per hour) 6.00 Fixed overhead (1 hour @ $13.00 per hour) 13.00     Total standard cost per test $53.00 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 2020, when 1,400 tests were conducted, resulted in the following. Direct materials (2,940 test tubes) $2,646 Direct labor (1,442 hours) 44,702 Variable overhead 8,512 Fixed overhead 16,968 Monthly budgeted fixed overhead is $17,030. Revenues for the month were $93,800, and selling and administrative expenses were $4,600.

(a) Compute the price and quantity variances for direct materials and direct labor. Materials price variance $ Favorable Unfavorable Neither favorable nor unfavorable Materials quantity variance $ Unfavorable Neither favorable nor unfavorable Favorable Labor price variance $ UnfavorableNeither favorable nor unfavorableFavorable Labor quantity variance

Answer 1

Ans. A 1	Materials price variance = (Standard price * Actual quantity) - Actual materials purchased cost
	($1 * 2,940) - $2,646
	$2,940 - $2,646
	$294	favorable
Ans. A 2	Direct materials quantity variance = (Standard quantity - actual quantity) * Standard price
	(2,800 - 2,940) * $1
	-140* $1
	-$140	or   $140 unfavorable
	*Standard quantity = Actual output * Standard quantity per unit of output
	1,400 tests * 2 test tubes per test
	2,800 test tubes
Ans. A 3	Labor rate variance = (Standard rate * Actual hours) - Actual labor cost
	($32 * 1,442) - $44,702
	$46,144 - $44,702
	$1,442	favorable
Ans. A 4	Direct labor efficiency variance = (Standard hours - Actual hours) * Standard rate
	(1,400 - 1,442) * $32
	-42 * $32
	-$1,344	or   $1,344 unfavorable
	*Standard hours = Actual output * Standard hours per unit of output
	1,400 tests * 1 hour per test
	1,400 hours
	*If the standard cost, rate or price and hours or quantity are higher than the actual it means the variance is favorable.
	*If the standard cost, rate or price and hours or quantity are lower than the actual it means the variance is unfavorable.