Pace Labs, Inc. provides mad cow disease testing for both state and federal gove
ID: 2461739 • Letter: P
Question
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 1,400 tests were conducted, resulted in the following:
Direct materials (2,842 test tubes) $ 5,400
Direct labor (1,456 hours) 43,680
Variable overhead 8,400
Fixed overhead 16,856
Monthly budgeted fixed overhead is $18,980. Revenues for the month were $92,400, and selling and administrative expenses were $4,400.
(a)
Compute the price and quantity variances for direct materials and direct labor.
Materials price variance
Materials quantity variance
Labor price variance
Labor quantity variance
(b)
Compute the total overhead variance.
(c)
Prepare an income statement for management
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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