Question

A. Judge Yankee Distilling Company produces a number of alcohol-based solvents for industrial contamination prevention use. One of the solvents, Ripit, is produced through an extensive distilling process. Yankee Distilling has developed the following standards for Ripit.

	Standard Quantity or Hours		Standard Price or Rate			Standard Cost
Direct materials	2.10	ounces	$	22.00	per ounce	$	46.20
Direct labor	0.80	hours	$	15.00	per hour		12.00
Variable manufacturing overhead	0.80	hours	$	2.50	per hour		2.00
Total standard cost per unit						$	60.20

For the month of August, Yankee Distilling recorded the following activity related to the production of Ripit:

1. Materials purchased, 10,500 ounces at a cost of $216,825.

2. There was no beginning inventory of materials; however, at the end of the month, 2,600 ounces of material remained in ending inventory.

3. The company employs 20 lab technicians to work on the production of Ripit. During August, they each worked an average of 180 hours at an average pay rate of $14.00 per hour.

4. Variable manufacturing overhead is assigned to Ripit on the basis of direct labor-hours. Variable manufacturing overhead costs during August totaled $7,000.

5. During August, the company produced 3,700 units of Ripit.

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 20 technicians employed in the production of Ripit consisted of 8 senior technicians and 12 assistants. During August, 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

Actual materials used	7900	=10500-2600
Actual labor hours	3600	=20*180
1
a
Materials price variance	14175	F	=216825-(10500*22)
Materials quantity variance	2860	U	=22*(7900-3700*2.1)
b
Yes, as materials variance is favorable
2
a
Labor rate variance	3600	F	=3600*(14-15)
Labor efficiency variance	9600	U	=15*(3600-3700*0.8)
b
No, as labor variance is unfavorable
3
Variable overhead rate variance	2000	F	=7000-(3600*2.5)
Variable overhead efficiency variance	1600	U	=2.5*(3600-3700*0.8)