Pace Labs, Inc. provides mad cow disease testing for both state and federal gove
ID: 341703 • 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.
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 2017, when 1,475 tests were conducted, resulted in the following:
Monthly budgeted fixed overhead is $14,000. Revenues for the month were $75,000, and selling and administrative expenses were $5,000.
Instruction:
a) Compute the price and quantity variances for direct materials and direct labor.
b) Compute the total overhead variance
c) Prepare and Income Statement for management
d) Provide possible explanations for each unfavorable variance
Direct materials (2.00 test tubes @ $1.46 per tube) $ 2.92 Direct labor (1.00 hour @ $24 per hour) 24 Variable overhead (1.00 hour @ $6 per hour) 6 Fixed overhead (1.00 hour @ $10 per hour) 10 Total standard cost per test $42.92Explanation / Answer
Standard Data: Qty Rate PU Direct Material 2 1.46 2.92 Direct Labor 1 24.00 24.00 Variable OH 1 6.00 6.00 Fixed OH 1 10.00 10.00 Fixed Budgeted OH 14000 42.92 Budgeted Hours 1400 Overhead Rate 10.00 Actual Test 1475 Standard Data for Actual: Qty Rate PU Direct Material 2950 1.46 4,307 Direct Labor 1475 24.00 35,400 Variable OH 1475 6.00 8,850 8,850 Fixed OH 48,557 Actual data Qty Rate PU Direct Material 3050 1.40 4,270 Direct Labor 1550 23.00 35,650 Variable OH 1550 4.77 7,400 Fixed OH 15,000 62,320 A Computation of Variances: Direct Material: Price Variance (SP-AP)AQ (1.46-1.40)*3050 183 Favorable Efficiency Variance (SQ-AQ)SP (2950-3050)*1.46 -146 Advrse Direct Labor: Price Variance (SP-AP)AQ (24-23)*1550 1550 Favorable Efficiency Variance (SQ-AQ)SP (1475-1550)*24 -1800 Advrse B Variable OH Variance: (Standard Cost-Actual Cost) (8850-7400) 1450 Favorable Actual H 1550 Fixed OH Variance: Rate 10 Actual Fixed Oh-Absored OH Absorebed 15500 (15000-15500) 500 Favorable Total OH Variance 1950 Favorable Pace Labs Inc Income Statement For the month of Nov'17 Sales 75000 Less: Variable Cost Direct Material 4,270 Direct Labor 35,650 Variable OH 7,400 47,320 Gross Margin 27,680 Less: Fixed OH 15,000 Less: S&A Expense 5000 20,000 Net Operating Income 7,680 D Both the effiecncy Variances are Unfavourable/Adverse. Its look like the company production department hassome problem 1 There is a lot of lack of Efficency in Direct labor 2 For Material, this can be due to poor material quality as well
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