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Basic Variance Analysis

Basic Variance Analysis. See attached file for full problem description.

PROBLEM 10-14 Basic Variance Analysis

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: -

During November, the following activity was recorded by the company relative to production of Fludex:

a. Materials purchased, 340.2 kilograms at a cost of $225,000
b. There was no beginning inventory of materials; however, at the end of the month, 70.9 kilograms of material remained in ending inventory;
c. The company employs 35 lab technicians to work on the production of Fludex. During November, each 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 labour-hours. Variable manufacturing overhead costs during November totaled $18,200.
e. During November, 3,750 good units of Fludex were produced.

Required:

1. For direct materials used in the production of Fludex:
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? Explain.
2. For direct labour employed in the production of Fludex:
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 save costs. Would you recommend that the new labour mix be continued? Explain.

3. Compute the variable overhead spending and efficiency variances. What relation can you see between this efficiency variance and the labour efficiency variance?

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PROBLEM 10-14 Basic Variance Analysis

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: -

During November, the following activity was recorded by the company relative to production of Fludex:

a. Materials purchased, 340.2 kilograms at a cost of $225,000
b. There was no beginning inventory of materials; however, at the end of the month, 70.9 kilograms of material remained in ending inventory;
c. The company employs 35 lab technicians to work on the production of Fludex. During November, each 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 labour-hours. Variable manufacturing overhead costs during November totaled $18,200.
e. During November, 3,750 good units of Fludex were produced.

Required:

1. For direct materials used in the production of Fludex:
a. Compute the price and quantity variances.

In order to calculate price variance, we can compute by using the following equation:

Price variance = Actual quantity purchased x difference between actual and
standard costs per unit of input purchased

First, we need to find actual cost of material purchased. From the information given, ...

Solution Summary

This solution is comprised of a detailed explanation to compute the price and quantity variances, the rate and efficiency variances and the variable overhead spending and efficiency variances.

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