Chapter IO PROBLEM 10-14 Basic Variance Analysis (L010-1. LO10-2, LO10-3 Becton
ID: 2337909 • Letter: C
Question
Chapter IO PROBLEM 10-14 Basic Variance Analysis (L010-1. 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 Standard Price Standard Cost Direct materials ......2.5 ounces $20.00 per ounce $50.00 17.50 Direct labor .. 1.4 hours $12.50 per hour Variable manufacturing 1.4 hours 3.50 per hour 4.90 $72.40 During November, the following activity was recorded related to the production of Fludex: aterials purchased, 12,000 ounces at a cost of $225,000 2,500 b. There was no beginning inventory of materials; however, at the end of the month, ounces of material remained in ending inventory c. The company employs 35 lab technicians to work on the production of Fludex. Durine 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 S18,200 e. During November, 3,750 good units of Fludex were produced Required 1. For direct materials: Compute the price and quantity variances. 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? Explain. a. b. 2. For direct labor Compute the rate and efficiency variances. 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 fewer senior technicians and more assistants in order to save mend that the new labor mix be continued? Explain. a. b. with recom- costs. Would you 3. Compute the variable overhead rate and efficiency variances. What relation can you see between this efficiency variance and the labor efficiency variance?Explanation / Answer
Answer
---Actual:
Actual DATA for
3750
units
Quantity (AQ)
Rate (AR)
Actual Cost
Direct Material
9500 [12000 – 2500]
$ 18.75 [225000/12000]
$ 178,125.00
Direct labor
5600 [35 x 160]
$ 12.00
$ 67,200.00
Variable Overhead
5600
$ 3.25
$ 18,200.00
---Standard
Standard DATA for
3750
units
Quantity (SQ)
Rate (SR)
Standard Cost
[A]
[B]
[A x B]
Direct Material
( 2.5ounces x 3750 units)=9375ounces
$ 20.00
$ 187,500.00
Direct labor
( 1.4hr x 3750 units)=5250hr
$ 12.50
$ 65,625.00
Variable Overhead
( 1.4hr x 3750 units)=5250hr
$ 3.50
$ 18,375.00
Material Price Variance
(
Standard Rate
-
Actual Rate
)
x
Actual Quantity
(
$ 20.00
-
$ 18.75
)
x
9500
11875
Variance
$ 11,875.00
Favourable-F
Material Quantity Variance
(
Standard Quantity
-
Actual Quantity
)
x
Standard Rate
(
9375
-
9500
)
x
$ 20.00
-2500
Variance
$ 2,500.00
Unfavourable-U
YES, it is recommended to sign the contract because the price offered by the new supplier is LOWER than standard price per ounce. [Hence, Favourable Rate Variance]
Labor Rate Variance
(
Standard Rate
-
Actual Rate
)
x
Actual Labor Hours
(
$ 12.50
-
$ 12.00
)
x
5600
2800
Variance
$ 2,800.00
Favourable-F
Labour Efficiency Variance
(
Standard Hours
-
Actual Hours
)
x
Standard Rate
(
5250
-
5600
)
x
$ 12.50
-4375
Variance
$ 4,375.00
Unfavourable-U
NO, This should not be recommended. This is because analysis of Efficiency Variance states that using too many assistants has led to lower efficiency and MORE consumptions of hours.
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
---Relationship between Variable overhead efficiency variance and labor efficiency variance is that both are related and go like the other. If Labor efficiency variance is Unfavourable, Variable overhead efficiency variance will also be Unfavourable. This is because here Variable manufacturing overhead is assigned on the basis of direct labor hours.
Actual DATA for
3750
units
Quantity (AQ)
Rate (AR)
Actual Cost
Direct Material
9500 [12000 – 2500]
$ 18.75 [225000/12000]
$ 178,125.00
Direct labor
5600 [35 x 160]
$ 12.00
$ 67,200.00
Variable Overhead
5600
$ 3.25
$ 18,200.00
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