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: Direct materials Direct labor Variable manufacturing overhead Total standard cost per unit Standard Quantity or Hours 2.20 ounces 0.50 hours 0.50 hours Standard Price or Rate $25.00 per ounce $15.00 per hour $ 3.00 per hour Standard Cost $55.00 7.50 1.50 $64.00 During November, the following activity was recorded related to the production of Fludex: a. Materials purchased, 12,000 ounces at a cost of $282,000. b. There was no beginning inventory of materials; however, at the end of the month, 2,750 ounces of material remained in ending inventory. C. The company employs 25 lab technicians to work on the production of Fludex. During November, they each worked an average of 110 hours at an average pay rate of $11.50 per hour. d. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $2,400. e. During November, the company produced 4,100 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?

Answer 1

Actual materials used	9250	=12000-2750
Actual labor hours	2750	=25*110
1
a
Materials price variance	18000	F	=282000-(12000*25)
Materials quantity variance	5750	U	=25*(9250-4100*2.20)
b
Yes, as materials variance is favorable
2
a
Labor rate variance	9625	F	=2750*(11.5-15)
Labor efficiency variance	10500	U	=15*(2750-4100*0.5)
b
No, as labor variance is unfavorable
3
Variable overhead rate variance	5850	F	=2400-(2750*3)
Variable overhead efficiency variance	2100	U	=3*(2750-4100*0.5)