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Pace Labs, Inc
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.
Instructions
(a) Compute the price and quantity variances for direct materials and direct labor.
(b) Compute the total overhead variance.
(c) Prepare an income statement for management.
(d) Provide possible explanations for each unfavorable variance.
Expert Solution
(a) Materials price variance:
|
|
( AQ X AP ) (3,050 X $1.38*) |
–
– |
( AQ X SP ) (3,050 X $1.46) |
= |
$244 F |
*$4,209 ÷ 3,050
Materials quantity variance:
|
|
( AQ X SP ) (3,050 X $1.46) |
–
– |
( SQ X SP ) (3,000* X $1.46) |
= |
$73 U |
*1,500 X 2
Labor price variance:
|
|
( AH X AR) (1,600 X $23*) |
–
– |
( AH X SR) (1,600 X $24) |
= |
$1,600 F |
*$36,800 ÷ 1,600
Labor quantity variance:
|
|
( AH X SR) (1,600 X $24) |
–
– |
(SH X SR ) (1,500* X $24) |
= |
$2,400 U |
*1,500 X 1 hr.
(b) Total Overhead variance:
|
|
Actual Overhead $22,400 ($7,400 + $15,000) |
– – |
Overhead |
= |
$1,600 F |
*$10 + $6
(c)
PACE LABS, INC.
Income Statement
For the Month Ended November 30, 2014
Service revenue.................................................................................. $75,000
Cost of service provided (at standard)
(1,500 X $42.92)............................................................................ 64,380
Gross profit (at standard).................................................................. 10,620
Variances
Materials price.......................................................................... $ 244 F
Materials quantity.................................................................... 73 U
Labor price............................................................................... 1,600 F
Labor quantity......................................................................... 2,400 U
Overhead................................................................................. 1,600 F
Total variance x favorable............................................. 971
Gross profit (actual)........................................................................... 11,591
Selling and administrative expenses.................................................. 5,000
Net income......................................................................................... $ 6,591
(d) The unfavorable materials quantity variance could be caused by poor quality materials or inexperienced workers or faulty test procedures.
The unfavorable labor quantity variance could be caused by inexperienced workers, poor quality materials, or faulty test procedures.
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