PROBLEM $10-21$ Basic Variance Analysis $[$L$02,$ L$03,$ L$04]$

VitalAid Inc. manufactures a vacuum$-$sealed high$-$protein food supplement that it sells to food aid organizations

around the world. The company uses variable costing in conjunction with a standard costing

system and has established the following standards for one package of VitalAid bars:

Standard Standard Standard

Quantity or Hours Price or Rate Cost

Direct materials

Direct labour

Variable manufacturing overhead

Total standard variable cost

$350$ grams

$0\mathrm{.}25$ hours

$0\mathrm{.}5$ hours

$$12\mathrm{.}00$ per kg

$ $13\mathrm{.}00$ per hour

$$1\mathrm{.}60$ per hour

$$4\mathrm{.}20$

$$3\mathrm{.}25$

$$0\mathrm{.}80$

$$8\mathrm{.}25$

During October, the company recorded the following activity relative to production of VitalAid:

a$.$ The company produced $4,000$ packages during October.

b$.$ A total of $1,800$ kilograms of material was purchased at a cost of $$19,800.$

c$.$ There was no beginning inventory of materials; however, at the end of the month, $300$ kilograms of

material remained in ending inventory.

d$.$ The company employs $5$ people to work on the production of VitalAid. During October, each employee

worked an average of $185$ hours at an average rate of $$14\mathrm{.}00$ per hour.

e$.$ Variable manufacturing overhead is assigned to VitalAid on the basis of direct labour$-$hours.

Variable manufacturing overhead costs during October totalled $$1,850.$

The company's management is anxious to determine the efficiency of the VitalAid production activities.

Required:

$1.$ a$.$ Compute the price and quantity variances for direct materials used in the production of VitalAid.

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.

$2.$ a$.$ Compute the rate and efficiency variances for labour employed in the production of VitalAid.

b$.$ In the past, the $5$ people employed in the production of VitalAid consisted of $3$ senior workers

and $2$ assistants. During October, the company experimented with $4$ senior workers and $1$

assistant. Would you recommend that the new labour mix be continued? Explain.

$3.$ Compute the variable overhead spending and efficiency variances. What relationship can you see

between this efficiency variance and the labour efficiency variance?