Problem 23-5A (part level submission) Pace Labs, Inc. provides mad cow disease t

Question

Problem 23-5A (part level submission)

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 @ $2.00 per tube) $ 4.00

Direct labor (1 hour @ $31 per hour) 31.00

Variable overhead (1 hour @ $6 per hour) 6

Fixed overhead (1 hour @ $13 per hour) 13

Total standard cost per test $54.00 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 900 tests were conducted, resulted in the following:

Direct materials (1,845 test tubes) $ 3,487

Direct labor (927 hours) 26,883

Variable overhead 5,697

Fixed overhead 10,620

Monthly budgeted fixed overhead is $17,680. Revenues for the month were $60,300, and selling and administrative expenses were $3,740.

Compute the price and quantity variances for direct materials and direct labor.

Materials price variance $ UnfavorableFavorable Materials quantity variance $ UnfavorableFavorable Labor price variance $ FavorableUnfavorable Labor quantity variance $

Explanation / Answer

a)

Material price Variance= Actual Quantity consumed * (Standard price- Actual Price)

= 2842 *(2- [5400/2842])

=2842*(2-1.90007) = $284 (Favourable)

Material Quantity Variance = Standard Price (standard Quantity - Actual Quantity)

= 2 ([2*1400] -2842)

= 2*(2800-2842)= $84 (Adverse)

Labour Price Variance= Actual Hours consumed *(Standard Rate- Actual rate)

=1456 (31- [43680/1456])

=1456(31-30)= $1456 (Favourable)

Labour Quantity variance= Standard Rate *(Standard hours- Actual Hours)

=31([1*1400]-1456)

=31*(1400-1456)= $1736 (Adverse)

b)

Total Overhead Variance=

= Variable overhead cost variance= (Standard rate *Standard hours) - Actual Overheads

=(6* 1456) - 8400 =$336 (favourable)

= Fixed overhead cost variance= (Standard rate *Standard hours) - Actual Overhead)

=(13*1456)-16856

= $2072 (Favourable)

Total Overhead Variance = Variable overhaed cost variance+ Fixed Overhead Cost variance

= $336+$2072= $2408 (Favourable)

c) Income Statement for Management

A)Revenue                                                        $ 92400

B) Costs

     a) Direct Materials                             $5400

    b) Direct Labour                                 $43680

    c) Variable Overhead                          $8400

    d) Fixed Overhead                             $16856

    e) Selling amd admistrative Exp          $4400

                     Total Cost                                      $78736

c) Income (A-B)                                                  $13664

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