Hello. I need help finding the total overhead variance and preparing an income s

ID: 2578564 • Letter: H

Question

Hello. I need help finding the total overhead variance and preparing an income statement. Thank you!

Problem 15-5 Indigo 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, Indigo Labs must constantly monitor and control its testing costs. Shown below are the standard costs for a typical test. Direct materials (2 test tubes $1.60 per tube) Direct labor (1 hour $22 per hour) Variable overhead (1 hour@ $6.00 per hour) Fixed overhead (1 hour $11.00 per hour) $3.20 22.00 6.00 11.00 $42.20 Total standard cost per test The lab does not maintain an inventory of test tubes. As a result, the tubes purchased each month are used that month. Actual activity for the month of November 2017, when 1,470 tests were conducted, resulted in the following: Direct materials (3,050 test tubes) Direct labor (1,541 hours) Variable overhead Fixed overhead $4,575 32,361 7,460 16,420 Monthly budgeted fixed overhead is $14,300. Revenues for the month were $82,320, and selling and administrative expenses were $4,000

Explanation / Answer

Total Overhead Variance:

= Standard total overhead or overhead allowed* - Actual total overhead**

= $ 23,120- $ 23,880

=$ 760 (Unfavourable)

Answer: $ 760 (Unfavourable)

*Standard total overhead or overhead allowed= Budgeted fixed overhead+ Budgeted variable overhead

= Budgeted fixed overhead+ (Budgeted output in hours X variable overhead per hour)

= $ 14,300 + (1470 X 6)

=$ 14,300 + $ 8,820

= $ 23,120

Note:-Budgeted output is taken in hours because variable overhead is given as per hour.

Budgeted output in hours is 1470 because standard direct labour is one hour. So, by multiplying standard direct labour rate with actual number of tests we get budgeted output in hours. (As for single test standard time is one hour so for 1470 tests, standard time will be 1470 X 1= 1470 hours).

**Actual total overhead= Actual variable overhead+ Actual fixed overhead

=$ 7,460+ $ 16,420

=$ 23,880

INDIGO LABS, INC.

Income Statement

Particulars

Amount (in $)

Revenue

82,320

Less: Material Cost (Actual)

4,575

Less: Labour Cost (Actual)

32,361

36,936

Gross profit

45,384

Less: Variable overhead (Actual)

7,460

Contribution Margin

37,924

Less: Fixed overhead

16,420

Less: Selling and administrative expenses

4,000

Net Operating Income

17,504