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 Cost Standard Quantity or Hours 2.0 ounces 0.60 hours 2.0 hours Standard Price or Rate $27.00 per ounce $12.00 per hour $ 3.5e per hour Direct materials Direct labor Variable manufacturing overhead Total standard cost per unit $64.50 7.20 $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 anxious to enter into a long term purchase contract. Would you recommend that the company sign the contract? 2. For direct labor

Answer 1

SOLUTION:

1)

The following information is provided for direct materials

• The actual production is 4,200 units
• the actual purchase is 13,000 ounces
• the total material purchase cost is $3,30,200
• The actual price paid $25.4 per ounce. ($3,30,200 / 13,000)
• the ending inventory is 2,850 ounces
• The actual material used to produce 4,200 units is 10,150 ounces (13,000 - 2,850)
• The standard price is $27 per ounce
• The standard quantity is 2.4 ounce required to produce one unit of whim
• the total standard quantity required to produce 4,200 units is 10,080 ounces (4,200 units x 2.4 ounces per unit)

a) Materials price variance = AQ (AP – SP)

(25.4-27)*13000 = $20,800 Favorable

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

Materials quantity variance =

SP (AQ – SQ)

(10150-10080)*27

$1890 unfavourable

The Material usage variance is $1890 unfavorable as the actual quantity used is more than the standard quantity used

b) Yes, the contract labour should be signed.

2)

a)

Solution:Labor Rate (Price) Variance = AH (AR – SR)

(11-12)*(35*160)

5600 Unfavourable

Unfavorable Labor efficiency (Usage) variance = SR (AH – SH)

$12 per hour X ([20 x 160] hours – [0.6 x 4200] hours)

= $8,160 Favorable

b)No, new labor mix should not be continued because new labor mix increases overall labor costs.The new mix resulting in favorable direct labor rate variance,however due to inexperienced staff engaged more, time taken in production increased resulting in unfavorable labor efficiency variance. As the direct labor inefficiency variance is higher than the favorable rate variance, a new labor mix should not be continued

3)

a) Solution:

Standard hours of direct labor = 4200*0.6 = 2520 hours

Standard rate of variable overhead= $3.50 per hour

Actual hours of direct labor = 20*160 = 3200 hours

Actual rate of variable overhead = $6000 / 3200 = $1.875 per hour

Variable overhead spending variance = AH (AR – SR)

=(3.5-1.875)*3200

=5200 Favourable

Variable overhead efficiency variance = SR (AH – SH)

=3.5(2520-3200)

=2380 Unfavourable