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	2.5	ounces	$	20.00	per ounce	$	50.00
Direct labor	1.4	hours	$	22.50	per hour		31.50
Variable manufacturing overhead	1.4	hours	$	3.50	per hour		4.90
Total standard cost per unit						$	86.40

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

1. Materials purchased, 12,000 ounces at a cost of $225,000.
2. There was no beginning inventory of materials; however, at the end of the month, 2,500 ounces of material remained in ending inventory.
3. The company employs 35 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 $22 per hour.
4. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $18,200.
5. During November, the company produced 3,750 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 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 reduce labor costs. Would you recommend that the new labor mix be continued?

3. Compute the variable overhead rate and efficiency variances.

Answer 1

• Working

Actual DATA for		3750	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct Material	9500	$                18.75	$        178,125.00
Direct labor	5600	$                22.00	$        123,200.00
Variable Overhead	5600	$                   3.25	$           18,200.00

Standard DATA for		3750	units
	Quantity (SQ)	Rate (SR)	Standard Cost
	[A]	[B]	[A x B]
Direct Material	( 2.5 ounce x 3750 units)=9375 ounce	$                20.00	$     187,500.00
Direct labor	( 1.4 hours x 3750 units)=5250 hours	$                22.50	$     118,125.00
Variable Overhead	( 1.4 hours x 3750 units)=5250 hours	$                   3.50	$       18,375.00

• Requirement 1

Part [a]

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                              20.00	-	$                    18.75	)	x	9500
	11875
	Variance		$            11,875.00			Favourable-F

OR

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                              20.00	-	$                    18.75	)	x	12000
	15000
	Variance		$            15,000.00			Favourable-F

Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	9375	-	9500	)	x	$                        20.00
	-2500
	Variance		$              2,500.00			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
(	$                              22.50	-	$                    22.00	)	x	5600
	2800
	Variance		$              2,800.00			Favourable-F
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	5250	-	5600	)	x	$                        22.50
	-7875
	Variance		$              7,875.00			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
(	$                                3.50	-	$                       3.25	)	x	5600
	1400
	Variance		$              1,400.00			Favourable-F
Variable Overhead Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	5250	-	5600	)	x	$                           3.50
	-1225
	Variance		$              1,225.00			Unfavourable-U