Question 1 (52 marks)

COVID-19 virus is spreading around the world. The management of Hong Kong Dragon Lab (HKDL) is studying the costs for tests in the lab. HKDL has difficulty in recruiting sufficient technicians, and so higher hourly rate is paid to avoid shortage and labour turnover. Although 85% of the technicians are inexperienced and untrained, they are paid with same hourly pay rate as experienced technicians. HKDL bought outdated machinery to reduce the total costs for performing the lab tests.

HKDL has received some complaints because the fees for lab tests are higher than its competitors. HKDL has not used standard costs before. After you do the market research, you find the following worldwide averages for labs:

Containers: Four containers are required per lab test. These containers cost $5.5 each and will not be used again after the test is done.

Labour: Each saliva test should require 0.5 hours to complete, and each stool test should require 0.4 hours to complete. The average cost of this lab time is $22.5 per hour.

Overhead: Overhead cost is based on direct labour-hours. The average rate for variable overhead is $8.8 per hour.

Other useful information is extracted from HSL as follows:

i. Two types of tests are performed in the lab saliva tests and stool tests. During the past month, 1,800 saliva tests and 2,000 stool tests were performed in the lab.

ii. Small containers are used in both types of tests. During the past month, the lab purchased 16,000 containers at a cost of $84,800. No container was on hand at the beginning of the month and five hundred of these containers were unused at the end of the month.

iii. The labs variable overhead cost last month totaled $18,490.

iv. During the past month, 2,150 hours of labour time were recorded in the lab at a cost of $52,030.

Required:

For the 6 variances calculation, equation with workings format is suggested.

1. Calculate the standard quantity of containers allowed for tests performed. Calculate the materials price variance for the containers purchased last month and the materials quantity variance for the containers used last month (Hint: purchased units are not equal to used units). (14 marks)

2a. Calculate the standard hours allowed for tests performed. Calculate the labour rate variance and the labour efficiency variance. (14 marks)

2b. Explain with three reasons to support your answer in 2a (favourable or unfavourable) above (each simple reason less than 10 words). (12 marks)

3a. Calculate the variable overhead rate and efficiency variances. (12 marks)