Porcelain Gold Raw materials $ 70 $130 Direct labor 27 27 Variable overhead Fixed overhead 22 22 Total $127 $187 Fixed overhead is detailed as follows: Salary (supervisor) $26,000 Depreciation Rent (lab facility) 5,000 32,000
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Make or Buy, Qualitative Considerations
Hetrick Dentistry Services operates in a large metropolitan area. Currently, Hetrick has its own dental laboratory to produce porcelain and gold crowns. The unit costs to produce the crowns are as follows:
Overhead is applied on the basis of direct labor hours. These rates were computed by using 5,500 direct labor hours.
A local dental laboratory has offered to supply Hetrick all the crowns it needs. Its price is $125 for porcelain crowns and $150 for gold crowns; however, the offer is conditional on supplying both types of crowns-it will not supply just one type for the price indicated. If the offer is accepted, the equipment used by Hetrick's laboratory would be scrapped (it is old and has no market value), and the lab facility would be closed. Hetrick uses 2,000 porcelain crowns and 600 gold crowns per year.
Required:
1. CONCEPTUAL CONNECTION Should Hetrick continue to make its own crowns, or should they be purchased from the external supplier? What is the dollar effect of purchasing?
2. CONCEPTUAL CONNECTION What qualitative factors should
Hetrick consider in making this decision?
3. CONCEPTUAL CONNECTION Suppose that the lab facility is
owned rather than rented and that the $32,000 is depreciation
rather than rent. What effect does this have on the analysis in Requirement 1?
4. CONCEPTUAL CONNECTION Refer to the original data. Assume that the volume of crowns used is 4,200 porcelain and 600 gold. Should Hetrick make or buy the crowns? Explain the outcome.
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