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:

	Standard Quantity or Hours		Standard Price or Rate			Standard Cost
Direct materials	2.30	ounces	$	24.00	per ounce	$	55.20
Direct labor	0.80	hours	$	15.00	per hour		12.00
Variable manufacturing overhead	0.80	hours	$	3.50	per hour		2.80
Total standard cost per unit						$	70.00

During November, the following activity was recorded related to the production of Fludex:

1. Materials purchased, 12,500 ounces at a cost of $282,500.

2. There was no beginning inventory of materials; however, at the end of the month, 3,000 ounces of material remained in ending inventory.

3. The company employs 26 lab technicians to work on the production of Fludex. During November, they each worked an average of 150 hours at an average pay rate of $14.00 per hour.

4. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $8,000.

5. 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 26 technicians employed in the production of Fludex consisted of 4 senior technicians and 22 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.

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.)

	Materials price variance Materials quantity variance

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 No

	Labor rate variance Labor efficiency variance

In the past, the 26 technicians employed in the production of Fludex consisted of 4 senior technicians and 22 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

	Variable overhead rate variance Variable overhead efficiency variance

Answer 1