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(a)
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 @ $1.50 per tube) $ 3.00 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 $53.00
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 (1,863 test tubes) $ 2,608 Direct labor (945 hours) 27,405 Variable overhead 5,634 Fixed overhead 10,755
Monthly budgeted fixed overhead is $18,590. Revenues for the month were $58,500, and selling and administrative expenses were $4,500.
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Explanation / Answer
Material price variance = (Actual price - Standard price) x Actual quantity used
Actual price = 2608 / 1863 = 1.40 per test tube; standard price = 1.50 per test tube ; actual quantity = 1863
Material price variance = ( 1.40 - 1.50 ) * 1863 = 186.30 Faourable Variance
Material quantity variance = (Actual quantity - Standard Quantity ) * Standard price
Actual quantity = 1863 ; Standard quantity = 900 * 2 = 1800; Std price = 1.50
Material quantity variance = ( 1863 - 1800 ) * 1.50 = 94.50 Adverse
Direct labour quantity(efficeincy )variance = (Std Hours - Actual hours ) * Std Rate
Std Hours = 1 * 900 = 900 ; Std rate = 31 ; Actual hours = 945
Direct labour quantity(efficeincy )variance = ( 900 - 945 ) * 31 = 1395 Adverse
Direct labor price variance = ( Std rate - Actual Rate) * Actual Hours
Std rate = 31 ; Actual hours = 945 ; Actual rate = 27405/945 = 29
Direct labor price variance = ( 31 - 29 ) * 945 = 1890 favourabe
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