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.

Answer 1

Req-1(A)Computation of Material Price & Quanntity Variance

Material price variance = (SP - AP) * AQ purchased ' = ($24 - $22.60) * 12500 = $17500 F

Material quantity variance = (SQ - AQ Used ) * SP ' = (9430 Ounce - 9500 Ounce ) * $24 = $1680 U

Refrence

Standard qty of material = 4100 Units *2.30 Ounces= 9430 ounce

Actual quantity of material purchased = 12500 ounce

Actual quantity of material used = 12500 - 3000 = 9500 ounce

Standard price of material = $24 per ounce

Actual price of material = $282,500 / 12500 = $22.60

Req-1(B),Yes , Company should signed a contracct because , Material Price variance shows favourable which shows that actul material proceurement price is lesser than Standard Price.

Solution 2a:

Refrence

Standard hours of direct labor = 4100 Unit *0.80 Hour = 3280 hours

Standard rate of direct labor = $15 per hour

Actual hours of direct labor = 26 Technician *150 Hour = 3900 hours

Actual rate of direct labor = $14 per hour

Req-2(a) Labour Rate & Efficiency Variance

Direct labor rate variance = (SR - AR) * AH = ($15 - $14) * 3900 Hour = $3900 F

Direct labor efficiency variance = (SH - AH) * SR = (3280 - 3900) * $15= $9300 U

Req:2(b)NO, New labor mix should not be continued because Employing more assistant rather senior technician resulted in favorable direct labor rate variance but unfavorable laor efficiency variance. Further unfavorable efficiency variance is higher than favorable rate variance,

Req-3 Variable OH Rate & Efficiency Variance

Variable overhead rate variance = (SR - AR) * AH = ($3.50 - $2.0513) *3900 = $5650 F

Variable overhead efficiency variance = (SH - AH) * SR = (3280 - 3900) * $3.50 = $2170 U

Refrence

Standard hours of direct labor = 4100 Unit *0.80 Hour = 3280 hours

Standard rate of variable overhead= $3.50 per hour

Actual hours of direct labor = 26 Technician *150 Hour = 3900 hours

Actual rate of variable overhead = $8000 / 3900 = $2.0513