Question

Problem 10-14 Basic Varlance Analysis [LO10-1, LO10-2, LO10-3] Becton Labs, Inc.. produces various chemical compounds for industrial use. One compound, called Fludex, is prepared using an elaborate distilling process. The company has developed standard costs for one unit of Fludex, as follows: Direct materials Direct labor Variable manufacturing overhead Total standard cost per unit Standard Quantity or Hours 2.20 ounces 2.50 hours 2.50 hours Standard Price or Rate $25.00 per ounce $15.00 per hour $ 3.00 per hour Standard Cost $55.80 7.50 1.50 $64.88 During November, the following activity was recorded related to the production of Fludex: a. Materials purchased, 12.000 ounces at a cost of $282.000. b. There was no beginning inventory of materials; however, at the end of the month, 2.750 ounces of material remained in ending inventory. c. The company employs 25 lab technicians to work on the production of Fludex. During November, they each worked an average of 110 hours at an average pay rate of $11.50 per hour. d. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $2.400. e. During November, the company produced 4.100 units of Fludex. Required: 1. For direct materials: a. Compute the price and quantity variances. b. The materials were purchased from a new supplier who is anxious to enter into a long-term purchase contract. Would you recommend that the company sign the contract? 2. For direct labor: a. Compute the rate and efficiency variances. b. In the past, the 25 technicians employed in the production of Fludex consisted of 5 senior technicians and 20 assistants. During November, the company experimented with fewer senior technicians and more assistants in order to reduce labor costs. Would you recommend that the new labor mix be continued? 3. Compute the variable overhead rate and efficiency variances. Complete this question by entering your answers in the tabs below. Req 1A Reg 1B Reg 2A Reg 28 Reg 3 For direct materials, compute the price and quantity variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect i.e., zero variance). Input all amounts as positive values.) 18.000 Materials price variance Materials quantity variance Reg 1A Req 1B >

For direct materials, the materials were purchased from a new supplier who is anxious to enter into a long-term purchase contract. Would you recommend that the company sign the contract?

Yes or No

For direct labor, compute the rate and efficiency variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

	Labor rate variance Labor efficiency variance

In the past, the 25 technicians employed in the production of Fludex consisted of 5 senior technicians and 20 assistants. During November, the company experimented with fewer senior technicians and more assistants in order to reduce labor costs. Would you recommend that the new labor mix be continued?

Yes or No

Compute the variable overhead rate and efficiency variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

	Variable overhead rate variance Variable overhead efficiency variance

Answer 1

Part 1 a

	Standard price	-	Actual price	X	Actual quantity	=	Variance
Materials price variance	25		23.50		12000		18000	F
	Standard quantity	-	Actual quantity	X	Standard price	=	Variance
Material quantity variance	9020		9250		25		5750	U

Actual price = 282000/12000 = 23.50

Actual quantity used = 12000-2750 = 9250

Standard quantity = 4100*2.20 = 9020

Part 1 b

Yes, the contract probably should be signed. The new price of $23.50 per ounce is substantially lower than the old price of $25 per ounce, resulting in a favorable price variance of $18000 for the month. Moreover, there is a little or no problem in production which is depicted from the small materials quantity variance for the month.

Part 2 a

	Standard rate	-	Actual rate	X	Actual hours	=	Variance
Labor rate variance	15.0		11.50		2750		9625	F
	Standard hours	-	Actual hours	X	Standard rate	=	Variance
Labor efficiency variance	2050		2750		15		10500	U

Actual hours = 25*110 = 2750

Standard hours =4100*0.50 =2050

Part 2 b

No, it is not advisable to continue new labor mix probably. In spite of decrease in the average hourly labor cost from $15 to $11.50, which results into the $9625 favorable labor rate variance. The overall labor efficiency variance is greater than the labor rate variance. This shows that the new labor mix increases overall labor costs.

Part 3

	Standard rate	-	Actual rate	X	Actual hours	=	Variance
Variable overhead rate variance	3.00		0.87		2750		5858	F
	Standard hours	-	Actual hours	X	Standard rate	=	Variance
Variable overhead efficiency variance	2050		2750		3		2100	U

Actual rate per unit = 2400/2750 = 0.87