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 (2.00 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		$42.92

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:

Direct materials (3,050 test tubes)		$ 4,270
Direct labor (1,550 hours)		35,650
Variable overhead		7,400
Fixed overhead		15,000

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

Answer 1

	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