Problem 23-5A Pace Labs, Inc. provides mad cow disease testing for both state an

Question

Problem 23-5A Pace 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, Pace 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 Fixed overhead (1 hour @ $10 per hour) 10 Total standard cost per test $42.92 The lab does not maintain an inventory of test tubes. Therefore, the tubes purchased each month are used that month. Actual activity for the month of November 2014, when 1,500 tests were conducted, resulted in the following: Direct materials (3,050 test tubes) $ 4,209 Direct labor (1,600 hours) 36,800 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. Compute the price and quantity variances for direct materials and direct labor. Materials price variance $ Materials quantity variance $ Labor price variance $ Labor quantity variance $ Compute the total overhead variance. Total Overhead variance $ Prepare an income statement for management. PACE LABS, INC. Income Statement For the Month Ended November 30, 2014 $ $ $

Explanation / Answer

Solution:

Standard quantity of material for actual test performed = 1500*2 = 30000 Test Tubes

Actual quantity of material = 3050 Test tubes

Standard price of material = $1.46

Actual price of material = $4,209 / 3050 = $1.38

Material price variance = (SP - AP) * AQ = ($1.46 - $1.38) * 3050 = $244 F

Material quantity variance = (SQ - AQ) * SR = (3000 - 3050) * $1.46 = $73 U

Standard hours of direct labor = 1500 * 1 = 1500 hours

Standard rate of direct labor = $24

Actual hours of direct labor = 1600

Actual rate of direct labor = $36,800 / 1600 = $23 per hour

Direct labor rate variance = (SR - AR) * AH = ($24 - $23) * 1600 = $1,600 F

Direct labor efficiency variance = (SH - AH) * SR = (1500 - 1600) * $24 = $2,400 U

Actual manufacturing overhead = Variable overhead + Fixed overhead

= $7,400 + $15,000 = $22,400

Manufacturing overhead applied = (Standard hours for actual production * Standard rate)

= (1500 * $16) = $24,000

Total overhead variance = Manufacturing overhead applied - Actual manufacturing overhead

= $24,000 - $22,400

= $1,600 F

Pace Labs Inc. Income Statement For the month ended November 30, 2014 Particulars Amount Revenue $75,000.00 Cost of Sales: Direct material $4,209.00 Direct labor $36,800.00 Variable overhead $7,400.00 Fixed overhead $15,000.00 Total cost of sales $63,409.00 Gross Margin $11,591.00 Selling and administrative expenses $5,000.00 Net Operating Income $6,591.00

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