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

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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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.

Definition Definition System of assigning an estimated cost to the product (instead of the actual cost) so that the product cost can be determined well in advance and the pricing of the product can be done on time. Since the actual cost cannot be predicted at the initial stage of the production process, the estimated cost is recorded in the books. Any deviation of the estimated cost of the actual cost is adjusted in the books at the end of the period.

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