Background information Question: Pace Labs, Inc. provides mad cow disease testin

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Background information

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 @ $1.00 per tube) Direct labor (1 hour@ $32 per hour) Variable overhead (1 hour $6 per hour) Fixed overhead (1 hour @ $12 per hour) $ 2.00 32.00 6 12 $52.00 Total standard cost per test 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 (2,884 test tubes) Direct labor (1,456 hours) Variable overhead Fixed overhead $ 2,567 43,680 8,330 15,960 Monthly budgeted fixed overhead is $15,720. Revenues for the month were $92,400, and selling and administrative expenses were $4,120.

Explanation / Answer

A. Direct Material Price Variance: = Actual Quantity x Actual Price - Actual Quantity x Standard Price

= 2884 * 0.89 - 2884 * 1 = 2567 - 2884 = -317 = UNFAVOURABLE

Where,
   SQ is the standard quantity allowed
   AQ is the actual quantity of direct material used
   SP is the standard price per unit of direct material

SQ = Actual units produced * Standard Quantity of Direct Material Per Unit = 1,400 * 2 = 2800

AQ= 2884

SP= 1

(2800 -2884) * 1 = - 884 = UNFAVOURABLE

Direct Labor Rate Variance:

= Actual Quantity x Actual Rate - Actual Quantity x Standard Rate

2884 * 30 - 2884 * 32 = -5768 = UNFAVOURABLE

Direct Labor Effciency Variance: = Actual Hours x Standard Rate - Standard Hours x Standard Rate

= 43680 - 1456 * 32 = - 2912 = UNFAVOURABLE

B. Total Overhead Variance = 1+ 2+ 3+ 4 = 240 + (1752) +(406)+ 336 = - 1582 = Unfavourable

1. Fixed Factory Overhead = Actual Fixed OH - Budgeted Fixed OH > Spending Variance

= 15,960 - 15,720 = 240 = Favourable

2. Fixed Factory Overhead = Budgeted Fixed OH - Applied OH > Production Volume Variance

= 15,720 - 1456 * 12 = - 1752 = Unfavourable

3. Variable Factory Overhead = Actual Variable OH - Flexible Budget (FB) basedon Output(i.e., hrs. worked) Actual (AQ × SP) > Spending Variance

= 8330 - 1456 * 6 = -406 = Unfavourable

4. Variable Factory Overhead=   Flexible Budget (FB) basedon Input i.e., hrs. worked) (AQ × SP) - FB based on                                       output i.e.allowed hours (SQ × SP)> Efficiency Variance

= 1456 * 6 - 1400 * 6 = 336 = Favourable

DM Quantity Variance = ( SQ AQ ) × SP

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