Problem 10-14 Basic Variance Analysis [LO10-1, LO10-2,LO10-3]
Becton Labs, Inc., produces various chemical compounds forindustrial use. One compound, called Fludex, is prepared using anelaborate distilling process. The company has developed standardcosts 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 tothe production of Fludex:
- Materials purchased, 12,000 ounces at a cost of $225,000.
- There was no beginning inventory of materials; however, at theend of the month, 2,500 ounces of material remained in endinginventory.
- The company employs 35 lab technicians to work on theproduction of Fludex. During November, they each worked an averageof 160 hours at an average pay rate of $22 per hour.
- Variable manufacturing overhead is assigned to Fludex on thebasis of direct labor-hours. Variable manufacturing overhead costsduring November totaled $18,200.
- During November, the company produced 3,750 units ofFludex.
Required:
1. For direct materials:
a. Compute the price and quantity variances.
b. The materials were purchased from a new supplier who isanxious to enter into a long-term purchase contract. Would yourecommend 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 ofFludex consisted of 20 senior technicians and 15 assistants. DuringNovember, the company experimented with fewer senior techniciansand more assistants in order to reduce labor costs. Would yourecommend that the new labor mix be continued?
3. Compute the variable overhead rate and efficiencyvariances.
