Agri 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, Agri Labs must constantly monitor and control its testing costs. Shown below are the standard costs for a typical test.
Direct materials (2 test tubes @ $1.50 per tube) ..... $ 3
Direct labor (1 hour @ $25 per hour) ........ 25
Variable overhead (1 hour @ $5 per hour) ........ 5
Fixed overhead (1 hour @ $10 per hour) ........ 10
Total standard cost per test ............. $43
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 2012, when 1,500 tests were conducted, resulted in the following:
Direct materials (3,050 test tubes) ...... $ 4,270
Direct labor (1,600 hours) .......... 36,800
Variable overhead ............... 7,400
Fixed overhead .............. 14,000
Monthly budgeted fixed overhead is $14,000. Revenues for the month were $75,000, and selling and administrative expenses were $4,000.
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.