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Compute variances, prepare an income statement, and explain unfavourable variances P24-5B Bonita Labs performs steroid testing services to high schools, colleges, and universities. Because the company deals solely with educational institutions, the price of each test is strictly regulated. Therefore, the costs incurred must be carefully monitored and controlled. Shown below are the standard costs for a typical test (LO 2, 3, 4) Direct materials (1 petri dish @ $1.80 per dish) Direct labor (0.5 hours@ $20.50 per hour) Variable overhead (0.5 hours @ $8 per hour) Fixed overhead (0.5 hours $5 per hour) Total standard cost per test $1.80 10.25 4.00 2.50 The lab does not maintain an inventory of petri dishes. Therefore, the dishes purchased each month are used that month. Actual activity for the month of May 2016, when 2,500 tests were conducted, resulted in the following Direct materials (2,530 dishes) Direct labor (1,240 hours) Variable overhead Fixed overhead $ 5,060 26,040 10,100 5,700 Monthly budgeted fixed overhead is $6,000. Revenues for the month were $55,000, and selling and administrative expenses were $2,000 Instructions (a) Compute the price and quantity variances for direct materials and direct labor. (b) Compute the total overhead variance (c) Prepare an income statement for management (d) Provide possible explanations for each unfavorable variance (a) LQV $205 F

Explanation / Answer

a)

1) Material Price Variance = Actual quantity ( Standard price - Actual price)

Material price varaince measures the variance that occurs in material cost due to change in material price

= 2530 ( 1.80 - 2.00) , = 506 U

2) Material Quantity Variance = Standard Price ( Standard Quantity - Atual Quantity)

Material quantity Variance measure change in material cost due to change in material qauntity used in production

1.80 ( 2500 - 2530), = 54 U

3) Labor price Variance= Actual hrs ( Standard rate- actual rate)

Labor price variance measures change in labor cost due to change in labor rate

= 1240 (20.50-21) , = 620 U

4) Labor quantity variance = Standard rate ( standard hrs -actual hrs)

Labor quantity variance measure change in labor cost due to change in labor hrs used in production process

20.50 ( 1250 - 1240) , = 205 F

b) Variable overheads and fixed overheads are absorbed on basis of labor hrs.

actual applied labor hrs = 1240 hrs

absorbed variable overheads = 1240 hrs x $ 8 per hr ( standard rate of variable overheads), = 9920

Absorbed fixed overheads = 1240 hrs x $ 5 per hr ( standard rate of fixed overheads) , =6200

Total Overheads absorbed = 9920 + 6200 , = 16120

Actual overheads = 10100 ( Variable) + 5700 ( fixed) , = 15800

Total overhead variance = Absorbed overheads - actual overheads, = 16120 -15800, = 320 F

d)

Reasons for u

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