Hi-Tek labs performs steroid testing services to high schools, colleges, and universities. Because the company deals solely with educational institutions, the price of each test is strictly regulated. Therefore, the costs incurred must be carefully monitored and controlled. Shown below are the standard costs for a typical test. Direct materials (1 petrie dish @ $2.00 per dish) Direct labor (0.5 hours @ $20.00 per hour) Variable Overhead (0.5 hours @ $8.00 per hour) $ 2.00 10.00 4.00 Total standard variable cost per test $16.00 The lab does not maintain an inventory of petrie dishes. Therefore, the dishes purchased each month are used that month. Actual activity for the month of May 2010, when 2,000 tests were conducted, resulted in the following. Direct materials (2,020 dishes used) Direct labor (995 hours) Variable overhead $ 4,242 $ 20,895 $ 8,100 REQUIRED: 3. Compute the rate and efficiency variances for variable overhead (5 pts.) 4. Provide possible explanations for each unfavorable variance. (5 pts.)
| Standard cost | Amount ( $) | ||||||||
| Direct Material( 1Petrie dish @$2 / dish) | 2 | ||||||||
| Direct Labour( 0.5 hr @$20 / hr) | 10 | ||||||||
| Variable OH( 0.5 hr @$8 / hr) | 4 | ||||||||
| Total Standard variable cost per test | 16 | ||||||||
| Actual activity of May Month | rate / Unit | ||||||||
| Direct material(2020 Dished out) | 4242 | 2.1 | ($4242/2020) | ||||||
| Direct Labour(995 hr) | 20895 | 21 | ($20895/995) | ||||||
| Variable OH | 8100 | ||||||||
| Material price Variance | -202 | Unfav | |||||||
| 2020*(2-2.1) | |||||||||
| ( actual Unit *( Standard rate - Actual rate) | |||||||||
| Material Quantity Variance | -40 | Unfav | |||||||
| (2*(2000-2020) | |||||||||
| Action Point - Company needs look into Unfav Quanity variance and established proper check | |||||||||
| point pricing level to save Unfavorable position | |||||||||
| Labor rate varianc\e | -995 | Unfav | |||||||
| ( actual Hr *( Standard rate - Actual rate) | |||||||||
| 995*(20-21) | |||||||||
| Labor Quantity variance | 105 | Fav | |||||||
| Actual Labor rate / hr*(Standard rate on hr-Actual Hr) | |||||||||
| 21*(2000*0.5-995) | |||||||||
| Action Point - Company needs to look into Labour rate variance which is showing Unfav . | |||||||||
| Actual rate has been crossed standard rate and create cost over run in Organization and impact | |||||||||
| Adverse on PNL | |||||||||
| Variable OH | |||||||||
| Variable OH( 0.5 hr @$8 / hr) | |||||||||
| Output to produced - 2000 Unit | |||||||||
| ('2000*0.5/hr*$8/hr) | 8000 | ||||||||
| Actual Variable OH | 8100 | ||||||||
| Variance Rate | 8000-8100 | ||||||||
| Variance Rate | -100 | ||||||||
| Volume/ Efficiency Variance | |||||||||
| ($8/hr (1000-995) | 40 | ( Favorable) | |||||||
| Standard rate *(Standard hrs- Actual hrs) | |||||||||
| Company needs to look into rate variance , so the price of the product | |||||||||
| should be under controllable | |||||||||
| Rate Variance | 140 | Fav | |||
| Actual Variable OH-Actual direct labour hr * Standrd rate | |||||
| 8100-995*8) | |||||
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