VARIANCE ANALYSIS IN A PROCESS-COSTING SETTING Problem 9-36 CHAPTER 6 REQUIRED),
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VARIANCE ANALYSIS IN A PROCESS-COSTING SETTING Problem 9-36 CHAPTER 6 REQUIRED), SERVICE FIRM Aspen Medical Laboratory performs comprehensive blood tests for physicians and clinics throughout the Southwest. Aspen uses a standard process-costing system for its co hensive blood work. Skilled technicians perform the blood tests. Because Aspen uses a standard costing system, equivalent units are calculated using the FIFO mcthod. The standard cost sheet for the blood test follows (these standards were used throughout the calendar year): mpre-Explanation / Answer
1. Standard Costing system is used to calculate the variances in the materials, labor & overheads for comparing the budgeted results with actual results. Such variances are implemented on the basis of the actual output prodduced during the period. FIFO method is used to calculate the equivalent units produced during this period so that actual result can be calculated on the basis of such units produced and sold.
2. Calculation of Cost of goods Sold (Actual basis not budgeted)
Calculation of Equivalent tests completed during the period
Equivalent units
Period
Units
Completed
Equivalent units
Beginning WIP
1,250
40% (Completed this year)
1250 x 40% = 500 units
Tests Started
25,000
100% of (25000-2500)
22,500
Ending WIP
2,500
40%
2,500 x 40% = 1,000
Equivalent tests completed
24,000 tests
Note: Being FIFO method ending WIP is including tests started during this year only.
Cost of Goods Sold / Tests Completed = Materials + Labor cost + Variable overheads
= (102,000 x $4.25) + (47,000 x 19) + 144,000 = $1,470,500
Cost of goods sold per unit = $1,470,500 / 24,000 tests = $61.2708 per test
3. Calculation of Variances
a. Material Price Variance = (Standard Rate - Actual Rate) x Materials Purchased
Standard Rate = $4.50
Actual Rate = $4.25
Material Price Variance = (4.50 - 4.25) x 102,000 = $25,500 Favorable
b. Material Quantity Variance = (Standard Quantity for actual output - Actual Quantity) x Standard Rate
Standard Quantity for actual output = 24,000 tests x 4 oz = 96,000 oz.
Actual Quantity used = 102,000 oz
Material Quantity Variance = (96,000 - 102,000) x 4.50 = $27,000 Unfavorable.
c. Labor Rate Variance = (Standard Rate per hour - Actual Rate) x Actual hours worked
= (18 - 19) x 47,000 = $47,000 Unfavorable
d. Labor efficiency variance = (Standard hours for actual output - Actual hours) x Standard Rate per hour
Standard hours = 24,000 tests x 2 hours = 48,000 hours
Actual Hours = 47,000
Labor efficiency variance = (48,000 - 47,000) x 18 = $18,000 Favorable
Period
Units
Completed
Equivalent units
Beginning WIP
1,250
40% (Completed this year)
1250 x 40% = 500 units
Tests Started
25,000
100% of (25000-2500)
22,500
Ending WIP
2,500
40%
2,500 x 40% = 1,000
Equivalent tests completed
24,000 tests
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