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 @ $1.46 per tube) $ 2.92 Direct Labor (1 hour @ $24 per hour) 24.00 Variable overhead (1 hour @ $6 per hour) 6.00 Fixed overhead (1 hour @ $10 per hour) 10.00 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 2014, when 1,500 tests were conducted, resulted in the following. Direct materials (3,050 test tubes) $ 4,209 Direct Labor (1,600 hours) 36,800 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 Formulas: Direct material price variance = AQ X AP or actual direct material cost - AQ X SP Direct material quantity variance = AQ X SP - SQ X SP Direct labor price or rate variance = AH X AR - AH X SR Direct labor quantity variance = AH X SR - SH X SR Where, AQ = Actual quantity SQ = Standard quantity AR =Actual rate SR = Standard rate AH = Actual hours SH = Standard hours SR = Standard rate AR = Actual rate Direct material price variance = AQ X AP or actual direct material cost - AQ X SP = $4,209 - (3,050 X 1.46 ) = 4,209 - $4,453 = 244 FAVORABLE Direct material quantity variance = AQ X SP - SQ X SP = (3,050 X 1.46 ) - [ (1500 X 2 test tubes) x $1.46 ] = 4,453 - 4,380 = 73 UNFAVORABLE Direct labor price or rate variance = AH X AR - AH X SR = $ 36,800 - 1600 hours x $24 per hour = 36,800 - 38,400 = 1,600 FAVORABLE Direct labor quantity variance = AH X SR - SH X SR = ( 1600 hours x $24 per hour ) - [ (1500 X 1) X$24 ] = $38,400 - 36,000 = 2400 UNFAVORABLE Total overhead variance refers to the difference between the total overhead applied and actual overhead. Total overhead is the sum of variable and fixed overheads. Total overhead variance= Overhead applied-Actual overhead =$24,000-$22,400=$1600 Favorable Working notes: Overhead applied = Number of tests conducted*(variable OH rate+Fixed OH rate) = 1500($6+$10)=$24000 Actual overhead= Variable overhead+Fixed overhead=$7,400+$15,000=$22,400 Instructions : Prepare an income statement for management
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 @ $1.46 per tube) $ 2.92
Direct Labor (1 hour @ $24 per hour) 24.00
Variable overhead (1 hour @ $6 per hour) 6.00
Fixed overhead (1 hour @ $10 per hour) 10.00
Total
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 1,500 tests were conducted, resulted in the following.
Direct materials (3,050 test tubes) $ 4,209
Direct Labor (1,600 hours) 36,800
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
Formulas:
Direct material price variance = AQ X AP or actual direct material cost - AQ X SP
Direct material quantity variance = AQ X SP - SQ X SP
Direct labor price or rate variance = AH X AR - AH X SR
Direct labor quantity variance = AH X SR - SH X SR
Where,
AQ = Actual quantity
SQ = Standard quantity
AR =Actual rate
SR = Standard rate
AH = Actual hours
SH = Standard hours
SR = Standard rate
AR = Actual rate
Direct material price variance = AQ X AP or actual direct material cost - AQ X SP
= $4,209 - (3,050 X 1.46 )
= 4,209 - $4,453
= 244 FAVORABLE
Direct material quantity variance = AQ X SP - SQ X SP
= (3,050 X 1.46 ) - [ (1500 X 2 test tubes) x $1.46 ]
= 4,453 - 4,380
= 73 UNFAVORABLE
Direct labor price or rate variance = AH X AR - AH X SR
= $ 36,800 - 1600 hours x $24 per hour
= 36,800 - 38,400
= 1,600 FAVORABLE
Direct labor quantity variance = AH X SR - SH X SR
= ( 1600 hours x $24 per hour ) - [ (1500 X 1) X$24 ]
= $38,400 - 36,000
= 2400 UNFAVORABLE
Total overhead variance refers to the difference between the total overhead applied and actual overhead. Total overhead is the sum of variable and fixed overheads.
Total overhead variance= Overhead applied-Actual overhead =$24,000-$22,400=$1600 Favorable
Working notes:
Overhead applied = Number of tests conducted*(variable OH rate+Fixed OH rate) = 1500($6+$10)=$24000
Actual overhead= Variable overhead+Fixed overhead=$7,400+$15,000=$22,400
Instructions : Prepare an income statement for management
Thanks in advance
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