Dillman Labs, provides mad cow disease testing for both state and federal govern

Question

Dillman Labs, provides mad cow disease testing for both state and federal government agricultural agencies. Because the company's customers are governmental agencies, prices are strictly forced. Therefore, Dillman's 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
Direct labor (1 hour @ $25 per hour) 25
Variable overhead (1 hour @ $5 per hour) 5
Fixed overhead (1 hour @ $10 per hour) 10

Total standard cost per test $43



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 2012, when 1,500 tests were conducted, resulted in the following:

Direct materials (3,050 test tubes) $ 4,270
Direct labor (1,600 hours) 36,800
Variable overhead 7,400
Fixed overhead 14,000


Monthly budgeted fixed overhead is $14,000. Revenues for the month were $75,000, and selling and administrative expenses were $4,000.


(a) Compute the price and quantity variances for direct materials and direct labor.

(b) Compute the total overhead varience.

(c)Calculate the manufacturing overhead controllable variance and the manufacturing overhead volume variance as well as the total manufacturing overhead variance.

Explanation / Answer

labour rate(price) variance Any deviation from standard in the average hourly rate paid to workers: For example, assume that the standard cost of direct labor per unit of product A is 2.5 hours X $14 = $35. Assume further that during the month of March the company recorded 4,500 hours of direct labor time. The actual cost of this labor time was $64,800, or an average of $14.40 per hour. The company produced 2,000 units of product A during the month. The labor rate variance is ($14.40 - $14.00) X 4,500 hours = $1,800, which is unfavorable since the actual hourly rate exceeded the standard rate. This may be the result of unavoidable increases in labor rates, or it may reflect excessive labor costs due to use of higher skilled labor commanding higher wages. Price variance Difference between actual unit price and standard unit price, multiplied by actual quantity of input used. It reflects a change between the expected price and actual price of input. Price Variance = (Actual Price - Standard Price) X Actual Quantity where a positive result indicates an increase in costs (i.e., an unfavorable variance), while a negative result means a reduction in costs (i.e., a favorable variance). See also labor rate (price) variance ; materials price variance ; sales price variance Direct Material Price Variance Direct material price variance (also called the direct material spending/rate variance) is the product of actual quantity of direct material used and the difference between standard price and actual price per unit of direct material. It is calculated using the following formula: DM Price Variance = ( SP ? AP )

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