Question

Problem 10-14 Basic Variance 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 2.30 ounces 0.60 hours 0.60 hours Standard Price or Rate $17.00 per ounce $13.00 per hour $ 2.50 per hour Standard Cost $ 39.10 7.80 1.50 $ 48.40 During November, the following activity was recorded related to the production of Fludex: a. Materials purchased, 11,500 ounces at a cost of $178,825. b. There was no beginning inventory of materials; however, at the end of the month, 3,150 ounces of material remained in ending inventory. c. The company employs 17 lab technicians to work on the production of Fludex. During November, they each worked an average of 160 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 $3,000. e. During November, the company produced 3,500 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 17 technicians employed in the production of Fludex consisted of 4 senior technicians and 13 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?

Answer 1

Answers

• Workings

Actual DATA for		3500	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct Material	8350	$                15.55	$        129,842.50
Direct labor	2720	$                11.50	$           31,280.00
Variable Overhead	2720	$                   1.10	$             3,000.00

Standard DATA for		3500	units
	Quantity (SQ)	Rate (SR)	Standard Cost
	[A]	[B]	[A x B]
Direct Material	( 2.3 ounces x 3500 units)=8050 ounces	$                17.00	$     136,850.00
Direct labor	( 0.6 hours x 3500 units)=2100 hours	$                13.00	$       27,300.00
Variable Overhead	( 0.6 hours x 3500 units)=2100 hours	$                   2.50	$         5,250.00

• Requirement 1

Part A

Material Price Variance [if incorrect, please comment]
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                              17.00	-	$                    15.55	)	x	8350
	12107.5
	Variance		$            12,107.50			Favourable-F
Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	8050	-	8350	)	x	$                        17.00
	-5100
	Variance		$             5,100.00			Unfavourable-U

Part B

YES, it is recommended because the prices offered by the seller are LESS than the standard price of material.

• Requirement 2

Part A

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                              13.00	-	$                    11.50	)	x	2720
	4080
	Variance		$              4,080.00			Favourable-F
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	2100	-	2720	)	x	$                        13.00
	-8060
	Variance		$              8,060.00			Unfavourable-U

Part B

NO, it is not recommended, because this has led to lower efficiencies among workers, as evident by Unfavourable Efficiency Variance, calculated above.

• Requirement 3

Variable Overhead Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                                2.50	-	$                       1.10	)	x	2720
	3800
	Variance		$              3,800.00			Favourable-F
Variable Overhead Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	2100	-	2720	)	x	$                           2.50
	-1550
	Variance		$              1,550.00			Unfavourable-U