Question

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: standard Standard Quantity or Hours 2.00 ounces 0.60 hours Direct materials Direct labor Variable manufacturing overhead Total standard cost per unit standard Price or Rate $27.00 per Ounce $12.00 per hour $ 3.50 per hour S430 7.20 2.1e $74.10 During November, the following activity was recorded related to the production of Fludex a. Materials purchased, 13.000 ounces at a cost of $330.200. b. There was no beginning Inventory of materials however, at the end of the month 2.850 ounces of material remained in ending Inventory c. The company employs 20 lab technicians to work on the production of Fludex. During November, they each worked an average of 160 hours at an average pay rate of $11.00 per hour. d. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor hours. Variable manufacturing overhead costs during November totaled $6,000 e. During November, the company produced 4.200 units of Fludex Required: 1. For direct materials: a Compute the price and quantity variances b. The materials were purchased from a new supplier who is andous to enter into a long term purchase contract. Would you recommend that the company sign the contract? 2. For direct labor v 2 of 14 Next >

Answer 1

a) The material price variance is calculated below:

Actual price per ounce = 330,200/13,000 = $ 25.4

Material price variance = (actual price per ounce - standard price per ounce) x actual quantity purchased
= ($25.4 - $27) x 13000
= ($1.60) x 13,000
= ($20,800)

The material price variance is $20,800 favorable as the actual purchase cost is less than the budgeted purchase cost.

The material usage variance is calculated below

The actual material used to produce 4,200 units is 10,150 ounces (13,000 - 2,850)

the total standard quantity required to produce 4,200 units is 10,080 ounces (4,200 units x 2.4 ounces per unit)

Material usage variance = standard price per ounce x (actual quantity used - standard quantity required)
=$27 x (10,150 – 10,080)
=$27 x 70
=$1,890

The Material usage variance is $1,890 unfavorable as the actual quantity used is more than the standard quantity used.

b) The materials purchased from new supplier who is anxious to enter into long term contact. Although there is favorable price variance, meaning supplier has resulted in savings, the quality of the product is to be seen and the resultant sales. Purely, on the basis of material variance, as the price is less, the company should sign the contract

2) The following information is provided for direct labor

a) The Labor rate variance is calculated below

The actual labor hours used is 20*160 = 3200 hours

Labor price variance = (actual price per labor hour - standard price per labor hour) x actual labor hours
= ($11.00 - $12.00) x 3,200
= $3,200

The Labor price variance is $3,200 favorable as the actual labor rate is less than the budgeted labor rate

b) The Labor usage variance is calculated below

the standard labor hours used is 2,520 hours (4,200 units x 0.60 hours to produce per unit)

Labor usage variance = standard price per labor hour x (actual labor hours - standard labor hours)
=$12.00 x (3,200 - 2,520)
= $ 8,160

The Labor usage variance is $8,160 unfavourable as actual labor hours used is more than standard labor hours required

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