Question

I ONLY need help with instruction D.... (d)  Provide possible explanations for each unfavorable variance.

Bonita 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 petri dish @ $1.80 per dish)           $  1.80

Direct labor (0.5 hours @ $20.50 per hour)                   10.25

Variable overhead (0.5 hours @ $8 per hour)                 4.00

Fixed overhead (0.5 hours @ $5 per hour)                     2.50

Total standard cost per test                                       $18.55

The lab does not maintain an inventory of petri dishes. Therefore, the dishes purchased each month are used that month. Actual activity for the month of May 2016, when 2,500 tests were conducted, resulted in the following.

Direct materials (2,530 dishes)                                 $  5,060

Direct labor (1,240 hours)                                          26,040

Variable overhead                                                     10,100

Fixed overhead                                                           5,700

Monthly budgeted fixed overhead is $6,000. Revenues for the month were $55,000, and selling and administrative expenses were $2,000.

(d)  Provide possible explanations for each unfavorable variance.

(a)       Materials price variance:

( AQ  X  AP ) (2,530 X $2.00*) $5,060

– –

( AQ  X  SP ) (2,530 X $1.80) $4,554

=

$506 U

*$5,060 ÷ 2,530

            Materials quantity variance:

( AQ  X  SP ) (2,530 X $1.80) $4,554

– –

(  SQ  X  SP ) (2,500 X $1.80) $4,500

=

$54 U

            Labor price variance:

(AH X AR) (1,240 X $21*) $26,040

– –

(AH X SR) (1,240 X $20.50) $25,420

=

$620 U

*$26,040 ÷ 1,240

            Labor quantity variance:

(AH X SR) (1,240 X $20.50) $25,420

– –

( SH X SR ) (1,250* X $20.50) $25,625

=

$205 F

*2,500 X .5

(b)       Total overhead variance:

Actual Overhead $15,800 [($10,100 + $5,700)

– – –

Overhead Applied $16,250 (1,250 X $13*)

=

$450 F

*($8 + $5)

(c)

BONITA LABS

Income Statement

For the Month Ended May 31, 2017

                                                                                                                                                            

Service revenue...............................................................................                                   $55,000

Cost of service provided (at standard)

    ($18.55 X 2,500)............................................................................                                     46,375

Gross profit (at standard)...............................................................                                      8,625

Variances

          Materials price.......................................................................          $   506  U

          Materials quantity..................................................................                54  U

          Labor price.............................................................................             620  U

          Labor quantity........................................................................              205   F

          Overhead................................................................................              450   F

                    Total variance—unfavorable......................................                                          525

Gross profit (at actual)....................................................................                                        8,100

Selling and administrative expenses............................................                                       2,000

Net income .........................$6,100

Answer 1

As per the solutions provided, there are 3 Unfavourable variances:

1. Material Price Variance - $506U - This is because as per the budgeted standards, the purchase price of material is $1.80 but actual is $2.00. Since actual price is $0.20 higher than standard price, the variance is unfavourable.

2. Material Quantity Variance - $54U - This is because as per the budgeted standards, the input required was 2500 but the actual material used is 2530. Since actual material usage is 30 higher than standard, variance is unfavourable.

3. Labour Price Variance - $620U - This is because as per the budgeted standards, the labour cost was estimated at $20.50 per hour, but actual labour rate was $21. Since the labour rate is $0.50 higher than standard, variance is unfavourable.