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	Standard Price or Rate			Standard Cost
Direct materials	2.5 ounces	$	20.00	per ounce	$	50.00
Direct labor	1.4 hours	$	12.50	per hour		17.50
Variable manufacturing overhead	1.4 hours	$	3.50	per hour		4.90
					$	72.40

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

   

a.	Materials purchased, 12,000 ounces at a cost of $225,000.
b.	There was no beginning inventory of materials; however, at the end of the month, 2,500 ounces of material remained in ending inventory.
c.	The company employs 35 lab technicians to work on the production of Fludex. During November, they worked an average of 160 hours at an average rate of $12 per hour.
d.	Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $18,200.
e.	During November, 3,750 good units of Fludex were produced .

Required:

1.	For direct materials:

a.

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

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? Yes No 2. For direct labor: a. Compute the rate and efficiency variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).) 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? Yes No 2. For direct labor: a. Compute the rate and efficiency variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).) b. In the past, the 35 technicians employed in the production of Fludex consisted of 20 senior technicians and 15 assistants. During November, the company experimented with fewer senior technicians and more assistants in order to save costs. Would you recommend that the new labor mix be continued? Yes No 3. Compute the variable overhead rate and efficiency variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)

Answer 1

1)	for direct materials
	a.	price and quantity variance
			Standard	-	Actual	*	Actual	=	Variance
			price		price		quantiy
materials price variance			20		18.75		12,000	=	15000	F
			standard	-	Actual	*	Standard	=	Variance
			qty		qty		price
materials quantity variance			9375		9,500		20		2500	U
	b.	yes
2)	for direct labor
			Standard	-	Actual	*	Actual	=	Variance
			rate		rate		hours
labor price variance			12.5		12		5600	=	2800	F
			standard	-	Actual	*	Standard	=	Variance
			hours		hours		rate
labor efficiency variance			5250		5,600		12.5		4375	U
	b.	no
3)	for variable overhead
			Standard	-	Actual	*	Actual	=	Variance
			rate		rate		hours
Variable overhead rate			3.5		3.25		5,600	=	1400	F
			standard	-	Actual	*	Standard	=	Variance
			hours		hours		rate
variable overhead efficiency			5250		5,600		3.5		1225	U