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 @ $1.46 per tube)		$2.92
Direct labor (1 hour @ $24 per hour)		24.00
Variable overhead (1 hour @ $6 per hour)		6.00
Fixed overhead (1 hour @ $10 per hour)		10.00
Total standard cost per test		$42.92

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 1,475 tests were conducted, resulted in the following.

Direct materials (3,050 test tubes)		$4,270
Direct labor (1,550 hours)		35,650
Variable overhead		7,400
Fixed overhead		15,000

Monthly budgeted fixed overhead is $14,000. Revenues for the month were $75,000, and selling and administrative expenses were $5,000. The price and quantity variances for direct materials and direct labor as follows:

Materials price variance		$183	Favorable
Materials quantity variance		$146	Unfavorable
Labor price variance		$1,550	Favorable
Labor quantity variance		$1,800	Unfavorable

(d)

Provide possible explanations for each unfavorable variance.

Answer 1

(There are 2 Unfavorables - Material quantity variance and Labor quantity variance. Explanation is provided for only those as has been asked)

Material Quantity variance = (Actual material - Standard material) X Standard cost per unit
=> [3050 test tubes - (1475 tests X 2 test tubes)] X $1.46
=> (3050 - 2950) X $1.46
=> $146 UNFAVORABLE
It is unfavorable because it was BUDGETED that for every test conducted, two test tubes would be used. In the month of November 1475 tests were conducted so 2950 test tubes should have been used (1475 tests X 2 test tubes) but in ACTUAL 3050 test tubes were used showing 100 additional test tubes that were not required and couldn't be used in the following month as test tubes are supposed to be consumed in the month of purchase. Their budgeted price for per test tube being $1.46 brings total material quantity variance for $146 ($1.46 X 100 additional test tubes) which is UNFAVORABLE for the Hart Labs Inc.

Labor Quantity variance = (Actual hours - Standard hours) X Standard rate per labor hour
=> [1550 hours - (1475 test X 1 labor hour)] X $24
=> (1550 hours - 1475 hours) X $24
=> $1800 UNFAVORABLE
It is Unfavorable because it was BUDGETED that for every test conducted, one Labor hour will be used and paid for. In the month of November 1475 tests were conducted so 1475 Labor hours should have been used (1475 tests X $1 per labor hour) but in ACTUAL 1550 labor hours were consumed showing 75 additional labor hours which were paid for at the standard rate of $24 per hour which brings total Labor quantity variance to $1800 ($24 X 75 additional labor hours) which is UNFAVORABLE for the Hart Labs Inc.

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