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	2.50	ounces	$	22.00	per ounce	$	55.00
Direct labor	0.90	hours	$	16.00	per hour		14.40
Variable manufacturing overhead	0.90	hours	$	2.00	per hour		1.80
Total standard cost per unit						$	71.20

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

1. Materials purchased, 14,000 ounces at a cost of $289,800.

2. There was no beginning inventory of materials; however, at the end of the month, 4,050 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 $15.00 per hour.

4. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $5,000.

5. During November, the company produced 3,900 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 6 senior technicians and 20 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

1a.
Direct Material Price Variance = Actual material cost - Actual quantity purchased x Standard price
= $289800 - 14000 x 22 = $18200 (F)

Direct Material Quantity Variance = (Actual Quantity used - Standard quantity) x Standard Price
= (9950 - 3900 x 2.50) x 22 = $4400 (U)

b. Yes it is recommended to sign the contract

2a.
Direct labor Rate Variance = (Actual rate - Standard rate) x Actual hours
= ($15-16) x 3900 = $3900 (F)

Direct labor efficiency variance = (Actual hours - Standard hours) x Standard rate
= (3900 - 3900 x 0.90) x 16 = $6240 (U)

2b. New labor mix is not recommended

3
Variable overhead Rate Variance = Actual overhead - Standard rate x Actual hours
= $5000 - 3900 x 2 = $2800 (F)

Variable Overhead efficiency variance = (Actual hours - Standard hours) x Standard rate
= (3900 - 3900 x 0.90) x 2 = $780 (U)