Response to the following problem:
Bonita Labs performs steroid testing services to high schools, colleges, and universities. Because the company deals solely with educational institutions, the price of each test is strictly regulated. Therefore, the costs incurred must be carefully monitored and controlled. Shown below are the standard costs for a typical test.
Direct materials (1 petri dish @ $1.80 per dish) .............$ 1.80
Direct labor (0.5 hours @ $20.50 per hour) ...................10.25
Variable overhead (0.5 hours @ $8 per hour) ..................4.00
Fixed overhead (0.5 hours @ $5 per hour) .....................2.50
Total standard cost per test ....................................$18.55
The lab does not maintain an inventory of petri dishes. Therefore, the dishes purchased each month are used that month. Actual activity for the month of May 2014, when 2,500 tests were conducted, resulted in the following.
Direct materials (2,530 dishes) ...........................$ 5,060
Direct labor (1,240 hours) .................................26,040
Variable overhead ..........................................10,100
Fixed overhead ................................................5,700
Monthly budgeted fixed overhead is $6,000. Revenues for the month were $55,000, and selling and administrative expenses were $2,000.
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.